With the markets awash with rumour and speculation concerning the Bank of Japan and its plans to reduce rates still further, and into negative territory, it is no surprise to see this reflected on the weekly chart for the Yen index, which is increasingly developing into a strong pennant formation, and tightening ever further. As always once such patterns develop, one factor then dictates the ultimate development of the trend, and that’s time. The longer the time, then the greater the volatility and likely trend once the breakaway develops, and the analogy here is one of a coiled spring. The tighter the spring is wound, then the greater the stored energy once released with an explosive move then likely. This is the scenario now building in the yen index, with the BOJ and the Japanese government now standing in the wings, ready to act.
Indeed a report in yesterday’s media suggested the BOJ was considering putting NIRP at the centre of future monetary policy, whilst simultaneously reducing purchases of the 25 year JGB’s and increasing short term bond purchases due to a decline in the longer term yields. This morning’s news feeds have seen similar reports once again, but market reaction may not be as expected as much will depend on how the market views any further easing. Last time around, markets were less than impressed and viewed the stimulus as too little too late, with the yen strengthening as a result. No doubt the BOJ will be hoping for a more positive response this time, and from the technical picture now building on the weekly chart, it could be an explosive result.
By Anna Coulling
Charts from Quantum Trading Yen Index
Hi Anna, the article isn’t clear on whether your bullish or bearish on the Yen. The COT is bullish and my personal VPA analysis is ambiguously bullish.
If you think it could go either way big time, do you think a straddle on FXY is a smart play?
Thanks for your consideration.
Hi Chris, many thanks for writing and thanks for all your comments on the site which are much appreciated. With regard to the Yen this is a tricky one at present. As I’m sure you are aware the news and media is awash with comments from various BOJ officials and others with regard to further stimulus, with more reports suggesting the bank is ready to embrace negative interest rates. However as always the devil is in the detail and last time around, the program was not well received by the market, which is what makes gauging the response very tricky. All we can say at present is that on the slower timeframe JPY index, this is in a pennant pattern and building to a climax. The traditional way to trade such a pattern is using a directionless straddle strategy with volatility and range the optimal outcome. But as always, if the volatility does not materialise or the range is less than expected the strategy fails. With both the USD and the JPY now facing some interesting days ahead, all I can guarantee with any degree of certainty is volatility! – thanks again and all best wishes – Anna