Asia Day Ahead: Nikkei 225 surged on BoJ’s softer-than-expected move, USD/JPY breached 150.00 level

Market Recap

Wall Street managed to gain for the second straight day (DJIA +0.38%; S&P 500 +0.65%; Nasdaq+0.48%), but the relatively small gains still very much point to some wait-and-see ahead of the upcoming Federal Open Market Committee (FOMC) meeting. The VIX was down more than 8% overnight, as markets may expect less of a surprise from the Federal Reserve (Fed). This is in light of the absence of fresh economic projections at this meeting and that a rate hold has been fully priced, leaving the large triggers for market moves on Fed Chair Jerome Powell’s words and the Fed statement.

Nevertheless, US Treasury yields continue to firm overnight, positioning that the message for rates to be kept for longer may be retained. Recent persistence in US services inflation (closely watched by the Fed) seems to support that, but market focus may be on the language around whether the upcoming rate hold may be a ‘skip’ or a ‘pause’. How Fed Chair Jerome Powell view economic risks with recent surge in longer-term bond yields will also be on watch, with any room for patience or emphasis on data-dependency likely to be viewed as less hawkish.

The US dollar continues to hover just below its October 2023 high, seemingly keeping its sight on a retest of the 106.80 level ahead. It has been trading within a tight range over the past month, reflecting some near-term indecision despite a surge in Treasury yields. The upward trend remains in place, with the dollar trading above its Ichimoku cloud support on the daily chart, alongside various moving averages (50-day, 100-day, 200-day). Any break above the 106.80 level may support a move towards the 109.00 level next, while on the downside, the 105.00 level will serve as immediate support to defend.

Asia Open

Asian stocks look set for a positive open, with Nikkei +2.00%, ASX +0.37% and KOSPI +0.65% at the time of writing. The still-dovish takeaway from the Bank of Japan (BoJ) meeting has paved the way for the Nikkei 225 to pull ahead in today’s session. While the central bank has taken steps to further loosen its grip on long-term interest rates by guiding the 1% upper bound for its 10-year Japanese Government Bond (JGB) yield as ‘reference’, rather than a rigid cap, the move has been softer than expected. Markets were expecting a shift in the upper yield cap to 1.5% from the previous 1.0%.

The Nikkei 225 has managed to stay supported off a lower channel trendline, keeping the downward channel pattern since June 2023 in place. A near-term bullish crossover has been formed on moving average convergence/divergence (MACD) as a reflection of reversing momentum to the upside. Buyers may set its sight on the 32,000 level next, where the Ichimoku cloud resistance on the daily chart stands near the upper channel resistance. Any upward break of the channel may leave the 33,500 level on watch next.

On the watchlist: USD/JPY breached key psychological 150.00 level

A softer-than-expected response out of the recent BoJ meeting has prompted the USD/JPY to breach the key psychological 150.00 level, with the pair seemingly setting its sight to retest its 33-year high at the 152.00 level next. A confirmation by the Japanese government that it did not intervene in the currency market in October was deemed as though Japanese authorities were still comfortable with the yen weakening above the 150.00 level, which triggered a 1.6% surge in the USD/JPY.

Having traded in a rising channel pattern since the start of the year, the upper channel trendline resistance at the 153.00 level will be on watch. For now, the daily relative strength index (RSI) has managed to bounce off the key 50 level, keeping the overall trend upward-bias. On the downside, the 150.00 level will now serve as a resistance-turned-support level.

Tuesday: DJIA +0.38%; S&P 500 +0.65%; Nasdaq +0.48%, DAX +0.64%, FTSE -0.08%