Last week, the Bank of Japan surprised markets and adjusted its Yield Curve Control policy, which many traders took as a sign that this could be the beginning of the end of Quantitative Easing for the BOJ. As a result, Yen pairs tumbled, with USD/JPY dropping over 500 pips! This week will be light in terms of economic data with the abbreviated holiday week in many countries. However, don’t look ahead to 2023 just yet. With a lack of participation in the markets this week, traders and investors who need to “get things done” may be able to push the markets one direction. Be ready for possible volatility.
BoJ
The BoJ met on Tuesday last week to discuss interest rate policy. Monetary policy was expected to remain unchanged, as it had been for so long now (with minor tweaks here and there), However, no one expected the Bank of Japan to adjust its Yield Curve Control by widening the band for the 10-year JGB. Yields can now fluctuate between +/-0.50% vs a previous band of +/-0.25%. Although Governor Kuroda denied that is was QT, markets were quick to take this as a message that this could be the “beginning” of QT. Prime Minister Kishida had also said that he would be revising the 10-year old statement that commits the BoJ to achieve its 2% inflation at the earliest possible date. Many expected this to take place after Kuroda’s term in April. Was the decision to widen the YCC band due to pressure from Kishida? BoJ Governor is due to speak on Monday on Monetary Policy. Any hints of QT could send Yen pairs lower once again.
End of Year
The last week of the year is usually a time when hedge funds, mutual funds, and pension funds either close their books for the year or at least tidy things up, if they haven’t done so already. However, there are also occasions when a market or markets move aggressively in one direction, in what could generally be called a “Santa Clause Rally”. This is done primarily when the street has taken big losses for the year and needs to try and make something happen during illiquid periods at the end of the year. Many times, it is done with stock index futures, which are often used as speculative tools for large traders. But it could be done in other futures contracts as well, and in the fx market. Watch for year-end volatility this week as traders close their books for the year.
Economic Data
Many of the end of month economic data prints had been moved up due to the holidays and end of year, such as the final look at Q3 GDP and Core PCE. Kuroda’s speech on Monday will closely be watched for hints of QE. In addition, US housing data and the Chicago PMI will also be monitored for signs of a slowdown. Other economic data to watch this week is as follows:
Monday
- Japan: BOJ Kuroda speechTuesday
- Japan: Unemployment Rate (DEC)
- Japan: Retail Sales (NOV)
- Japan: Housing Starts (NOV)
- US: S&P/Case Schiller Home Price (OCT)
- US: Dallas Fed Manufacturing Index (DEC)
Wednesday
- Japan: Industrial Production Prel (NOV)
- Japan: BoJ Summary of Opinions
- US: Pending Home Sales (NOV)
- US: Richmond Fed Manufacturing Index (DEC)
Thursday
- UK: BOE Consumer Credit (NOV)
- UK: Mortgage Approvals (NOV)
- Crude Inventories
Friday
- UK: Nationwide Housing Prices (DEC)
- Switzerland: KOF Leading Indicators
- US: Chicago PMI (DEC)
Chart of the Week: Daily USD/JPY
Source: Tradingview, Stone X
As mentioned above, USD/JPY sold off over 500 pips on December 20th when the BoJ announced a change in its YCC policy. This was a -3.80% move, and the largest percentage selloff of the year. On September 22nd, the BOJ intervened, and the pair sold off -1.22%. On October 24th, the BOJ intervened once again, and the pair sold off -1.65%. On November 10th, the US missed CPI expectations, and USD/JPY moved lower, this time down -3.72%. But it wasn’t until the BOJ tweaked its interest rate policy that caused the pair to fall by the most percentage points of the year. However, the selloff was halted at the lows from August 2nd and the 50% retracement from the lows of the year on January 14th to the highs of the year on September 28th. Notice that despite the large selloff last week, the pair is still trading within the longer-term downtrend channel it has been respecting since making yearly highs. The first support is at the December 20th lows at 130.56. Below there, the pair can fall to the 61.8% Fibonacci retracement level from the years low to high at 128.17. Resistance is directly above at 133.62. Above there, price can move to the top trendline of the channel near 136.00, then the highs from December 20th at 137.48.
As many traders, hedge funds, mutual funds, and pension funds end their trading for the year, the last week of 2022 could be quiet. However, because the market will be illiquid, the traders that are left may be able to push prices. So, watch for the possibility of a volatile end of year! Manage risk appropriately.
Note that the Week Ahead will be published on Thursday this week.
Have a great holiday week and New Year’s too!
