BIGGER THAN THE FED - When traders looked at the economic calendar this week, most knew full well that the BOJ could end up being the bigger event risk. Well, that's exactly how it's all played out, with the Fed rolling by as a non event, while the BOJ decision has absolutely rocked the market. The expectation heading into the BOJ was that the central bank would look to increase easing in an effort to stimulate the economy, help bolster subdued inflation and weaken the Yen.
4X ATR! - And so, with the BOJ doing nothing at all, the market went into panic mode, buying Yen at every turn, resulting in a USDJPY collapse to about 4X its average daily range! This left the major pair sitting just off the early April multi-month low of 107.63 and contemplating a break and drop below this major support. But overall, considering the fact that the BOJ is more than willing to do more going forward and knowing full well that the Japanese economy is in trouble, taking a breath and buying USDJPY into this dip is making good sense.
ON THE SURFACE - So what was the BOJ thinking? On the surface, the BOJ probably wanted to let this most recent round of stimulus from the previous decision, work its way through the system before making any additional moves. That would be a very logical explanation. After all, when looking back, it's certainly supportive of the fact that the BOJ held. In years past, after easing policy, the BOJ has shown a pattern of waiting before making any additional moves.
BENEATH THE SURFACE - But looking beneath the surface, I think there's another explanation that could just as easily make sense. So far in 2016, moves into additional accommodation have not exactly invited the reaction these central banks have been looking for. Recent accommodations from the BOJ and ECB have only ended with the Yen and Euro trading higher than before the accommodations! This is counterintuitive and something that should be making central banks very nervous, so much so, that doing nothing could be the better approach.
MORE CONTROL THIS WAY - It seems the market is no longer as impressed with accommodative gestures as it once was and this fact has opened the opposite reaction. So perhaps when the BOJ was thinking about today's decision, it opted to leave rates on hold knowing the Yen would rally, over the risk of adding additional stimulus, only to see the Yen initially sell off and then sharply reverse course, much to its dismay. So as strange as it may sound, maybe the BOJ felt a hold would have a better chance of opening less appreciation in the Yen than increased stimulus.
STRATEGY - As far as strategy goes, I have been buying USDJPY into this dip. On a short-term basis, the market has been crushed intraday and building into a long below 108.50 seems reasonable to me. On a medium to longer-term basis, the fundamentals are not in any way supportive of the Yen and we should expect to see this currency much lower. Of course, given the traditional correlation with risk assets, any weakness in stocks could open more downside pressure.
CORRELATION BREAKDOWN - But as I have already outlined many times, I believe we are on the verge of seeing a breakdown in the correlation between the Yen and safe haven flow. While it's true the Yen has been used as a funding currency, this should not be confused with safe haven currency status. I am long USDJPY at the time of this report from around 108.40 (about 4X leveraged) and will still consider adding a bit more. I would like to hold onto this one. Let's see.