Yen Posts Massive Gains After BoJ Meeting
Forex markets saw a marked increase in volatility this week, as forex traders remain focused on central bank activity in various locations around the world. The latest example came after the Bank of Japan (BoJ) monetary policy meeting, where no changes were made to extend the maturities for bank loans currently in the market. Given the size of the BoJ’sattempts to stimulate its economy (to bring normalized inflation levels and support for export companies), it was a surprise to big portions of the market to see no measures taken to step up activity in these areas. The result was a massive surge in the Yen and pronounced weakness in the US Dollar.
On a similar note, the latest meeting from the European Central Bank (ECB) led to no changes in interest rates and nothing in the way of significant financial headlines. This also led to heavy buying in the Euro (and selling in the US Dollar), as there was some scope for the ECB to implement negative interest rates. An outcome like this would have been significantly bearish for the Euro, so when this failed to materialize Euro bears were forced to bail out on their positions.
On the whole, it was a very volatile week in forex markets, and this is something of a surprise given our proximity now to the summer months. Generally we see declining liquidity in June and this tends to produce fewer price moves of any real magnitude. But at this state, central bank policy is the major guiding factor and this will continue into next week as well. So far, lack of any actioable change in central bank policy has been very bearish for the US Dollar, and there is scope for this to continue into the latter parts of next week as well.
The Week Ahead in Forex
All of the market attention on central banks will shift to the US next week, as the Federal Reserve interest rate decision will be critical for determining near term direction in stocks, commodities, and forex. If we see the Fed is willing to start cutting back on its monetary stimulus programs, we could see violent reversals in the value of the US Dollar. If, however, this does not materialize, we will most likely see follow through in the bullish Euro and Yen moves that were initiated last week. Because of this major event risk, we will probably see little in the way of volatility early on in the week, as investors wait on the sidelines before committing to new positions.
Regardless of the outcome, the trends that are established next week should set the tone for what happens the remainder of this month. The Fed meeting will take place on the 18-19, so forex traders will need to expect major changes in volatility once the meeting reaches its conclusion and the final results are made public.