Bank of Japan Injects Market Volatility with New Inflation Target; NZD/USD Showing Short Term Reversal Signals

Markets were injected with some renewed volatility overnight as the Bank of Japan (BoJ) concluded its latest monetary policy meeting by setting its inflation target at 1 percent, in a move that mirrors the policy strategy of the US Federal Reserve.  The bank pledged to increase its asset purchases (by 10 trillion Yen) in order to actually reach this inflation target.

These asset purchases will be directed exclusively toward the purchase of Japanese Government Bonds (JGBs) and will be concluded before the end of 2012. Relative to other countries, this move might not seem significant, but given that Japan’s core inflation is currently seen at -0.1 percent (annually), markets are beginning to price-in a more accommodative monetary policy and the Japanese Yen was sold off vigorously in early trading.  The USD/JPY rallied in response, reaching highs of 78.05, which is more than 200 points higher than the lows seen at the end of last week.

In Europe, the main story was the decision from Moody’s to downgrade the credit rating of six more EU (Italy, Portugal, Slovakia, Spain, Malta, and Slovenia).  The Spanish rating was lowered by 2 levels, where Italy was reduce by one.  Moody’s tempered this move by reaffirming the Aaa credit ratings that are currently held in the UK, France, and Austria, but at the same time, the outlook on these ratings was dropped to negative (previously, the outlook was “stable”).  Regional equity markets gapped lower on the news, with the FTSE 100 falling off of its weekly highs to trade at lows of 5840.

Looking ahead, the next session will focus on macro data out of the Eurozone and UK.  First up is the consumer inflation reading (CPI) out of the UK, where price pressures are expected to remain elevated at 3.8 percent but this would still show a marked decrease from last months print, which was seen at 4.2 percent.  Expect a lower reading to weigh on the British Pound (GBP) and send the FTSE 100 back toward its highs from yesterday.

The Eurozone data will be the ZEW Economic Sentiment Survey, which is expected to improve to -27 from -32.8 previously.  This number has the potential to take on a greater level of importance than is normally seen, given the recent rioting in Greece, as any improvement would signal that public perception isn’t totally negative and this could bring some buying back into the Euro after yesterday’s declines.

Technical Analysis:

The NZD/USD has broken some very significant resistance levels on the longer term charts but when we drill down to the hourlies, we see some evidence of a reversal.  The pair is currently caught in a symmetrical triangle with Fibonacci support at 0.8290 coming under pressure.  Once we see an hourly close below this level, the bias turns bearish and medium term short positions can be established.

The FTSE 100 gapped lower on the hourly charts and is now caught in a clearly defined range between 5880 and the psychological level at 5800.  We need to see a clear break of one of these levels before committing to a bias at this stage, but MACD readings are moderately bullish and attempting to cross into positive territory.  Wait for a clear break of the range, though a downside break will provide much better risk to reward for longer term positions.

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