USD/JPY implied volatility spikes ahead of BOJ: Asian Open – 31/10/2023

Market Summary:

• Israel has continued to face pressure to reduce its bombardment of Gaza to help with hostage negotiations, which saw oil fall 3% and erase all of its gains made during the 4-week Middle East conflict. WTI crude oil is on track for its most bearish month in five and a bearish engulfing month.
• Gold also pulled back from its cycle high and now trades just below $2000, although it has not pulled back to a degree which immediately threatens its bullish structure. Gold is on track for its most bullish month this year and for a bullish engulfing month.
• The US dollar was the weakest forex major which saw the USD index as it lost some of its safe-haven appeal and the surge in bond yields pause for breath
• USD/JPY fell for a second day following a weekend report from the Nikkei newspaper that the BOJ may discuss tweaking its YCC band. This has led to speculation that the central bank will either widen or abandon its YCC band al together and allow yields to trade freely, which has the potential to strengthen the yen and send USD/JPY much lower.
• EUR/USD rose to a 4-day high thanks to the weaker dollar and despite the fact German inflation softened, further backing up expectations that the ECB are done with hiking interest rates
• The central bank are set to announce their monetary policy decision today at 13:30 AEST / 02:30 GMT
• RBA cash rate futures now imply a 52% chance of the central bank hiking by 25bp next week following stronger-than-expected retail sales yesterday. Retail trade rose 0.9% m/m in September according to the ABS, with department store and household goods retailing rising 1.7% and 1.5% respectively.
• AUD/USD rose for a third day and was the strongest forex major on Monday. I noted last week that is continues to defy bears with a sustainable break below 63c and the November low provided support, which is why I prefer dips above that support level for near-term rallies.
• The S&P 500 rose for the 17^th Monday in a row. Whilst this has proven to be a false move in recent weeks, perhaps it stands a better chance of a recovery is Middle East tensions continue to recede. However, bears Nasdaq bears may be tempted to fade into moves up to the 14,600 resistance area.

Events in focus (AEDT):

• 10:30 – Japan unemployment, jobs/applications ratio
• 10:50 – Japan industrial production, retail sales
• 11:30 – New Zealand business confidence (ANZ)
• 11:30 – Australian housing credit
• 12:30 – China PMIs (manufacturing, services, composite – NBS)
• 13:30 – BOJ interest rate decision, quarterly outlook report
• 16:00 – Japan household confidence, housing starts
• 16:00 – Singapore business expectations
• 21:00 – Europe CPI

ASX 200 at a glance:

• The ASX 200 is on track for its third bearish month, which could be its first such bearish sequence since June 2022
• Real estate investment trusts, information technology and healthcare have been the worst performing sectors so far in October (-7.4%, -6.8% and -6.4% respectively) and the only sector to rise is utilities with a 1.4% gain
• The ASX 200 also started the week by getting out of the wrong side of bed, falling to a fresh YTD low beneath 6800 and forming a bearish engulfing day
• However, SPI 200 futures rose 0.4% on Monday which should see the ASX 200 cash index gap higher at the open and perhaps challenge 6800 resistance

USD/JPY technical analysis (daily chart):

USD/JPY remains within an established uptrend on the daily chart, although prices are retracing from their highs and a multi-month bearish divergence has formed with the RSI (14). 1-day implied volatility has blown out ahead of today’s BOJ meeting, with its 100-pip implied move coming in at 292% of its 20-day average and the 5-day implied volatility sitting at 179 pips. However, with expectations of BOJ action now rising whilst USD/JPY falls, it leaves the potential for a spike higher should the BOJ defiantly refuse to adjust their policy – and this would not be out of character for a central bank which prefer to surprise markets. Still, with the central bank seemingly leaking their intent to the press, we should be on guard for a policy change and the potential for a lower USD/JPY.

USD/JPY technical analysis (1-hour chart):

A bullish divergence has formed on the RSI (14) on USD/JPY’s 1-hour chart. Given it has found support around 149 and the tendency for Asia to retrace against the US session, then perhaps we’ll see a mild corrective bounce heading into the BOJ announcement. If so, the resistance zone around 149.40 may provide an area of interest for bears to consider fading into. Note that the lower 1-day implied volatility level is just above 148 and prior cycle lows.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

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