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Market reaction after BoJ decision

Jerry Chen
Research Strategist
18 Mar 2020
Following the Fed and RBNZ, the Bank of Japan moved forward the scheduled policy meeting (18-19 March) to Monday and announced an enhanced monetary easing to ensure smooth corporate financing and to maintain stability in financial markets. The interest rate was unchanged at -0.1% as expected.

Key measures

According to the monetary policy statement, the BoJ will:

  1. Provide ample supply of funds through Japan’s Government Bonds (JGB) purchase and US dollar funding operations, in which the BoJ, coordinating with other central banks, will lower swap rate by 25 bps and offered US dollar weekly with an 84-day maturity in addition to current 1-week maturity
  2. Introduce a new loan program with 0% interest rate up to one year and increase the upper limit to purchase commercial papers (CP) and corporate bonds by 2 trillion yen in total
  3. Actively purchase Exchanged Traded Funds (EFT) and Real Estate Investment Trust (J-REIT) with the upper limit of 12 trillion yen and 180 billion yen, respectively.

Prime Minister Abe noted that the central bank’s decision was swift and appropriate to combat the coronavirus impact, which has caused slumping exports, production and inbound tourists as well as weak CPI recently.

Market reaction

The joint efforts of global central banks failed to boost sentiment or improve the economic outlook. The S&P 500 plunged 11.98% with another circuit breaker triggered, while the Dow Jones wiped out 12.93% or nearly 3000 points. Far worse-than-forecasted data from China also dragged the Asian and European stocks lower, with Australia’s S&P/ASX 200 posting its worst day (-9.7%) on record.

JPN225 has been running below 200 SMA and touched a multi-year low of 16039 on Monday, near the long-term support level coming from November 2016. The RSI index is firmly moving south in the oversold territory.

During 911 and the global financial crisis when the oversold conditions of RSI were also seen on the weekly chart, the index recovered shortly. Will that be the case this time?

While the BoJ’s active ETF purchase plan might help in the short-term, the index in the long-term will still be affected by the market sentiment and global economic outlook.

JPN225 chart
MT4: JPN225 weekly chart

Now shift to USDJPY. Despite coordinated efforts by major central banks, mounting fears over coronavirus continues to weigh on investor sentiment and underpins the JPY’s safe-haven demand. JPY strengthened 1.69% to 105.83 on Monday.

As long as the volatility remains extremely high and there is a rush to cash, JPY will continue finding buyers and USDJPY rallies will be limited.

USDJPY chart
MT4: USDJPY daily chart

106.02 or 5-day EMA offers immediate support to the pair. The next support level appears at 104.45. On the upside, 108.23 or 200-day SMA is the barrier, which is also a good entry point for the buyers should the pair close above this level.

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