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