Bond Market Will Dictate BOJ's Next Move

Foreign policy and bond markets dominated the last week, as President Donald Trump’s postponement of 50% tariffs on the European Union lifted sentiment early. However, a weak Japanese long-dated bond auction on Wednesday signaled alarm.

The bid-to-cover ratio, a metric indicating the ratio between total bids and the total amount of securities offered for sale, was just 2.21 – far below the historical average of 3. This structural imbalance between supply and demand for Japan’s debt might force the Bank of Japan to reconsider its plans for a future rate hike. In fact, it might go the other direction and intervene in the market to constrain spiking bond yields.

The currency pair of interest in this story will likely be CHF/JPY, as the Swiss National Bank has already eased rates (and even started discussing negative rates). However, the flag pattern has been setting up since early April and is now approaching its apex.

The week ahead is filled with news, including Powell’s speech on Monday, two key interest rate decisions (from the Bank of Canada and the European Central Bank), and the ever-important Non-Farm Payroll report on the first Friday of the month.

Key News:

• Monday: USD – ISM PMI, Powell Speech
• Tuesday: CHF – CPI, JPY – Governor Ueda Speech, USD – JOLTS Jobs
• Wednesday: AUD – GDP q/q, USD – ADP Change, ISM PMI, CAD – BOC Rate Decision
• Thursday: EUR – Rate Decision, USD – Unemployment Claims
• Friday: CAD – Unemployment, USD – Unemployment Rate, NFP

Pairs In Focus

1.    CHF JPY

This pair has been setting a bullish flag pattern since Yen’s decline in early April. A successful breakout would set the stage for a 430-pip move to take out the previous high from a year ago.

CHF/JPY Daily Chart, Source: TradingView

2.    EUR AUD

The euro has started rebounding against the Australian dollar, closing last week with a solid 130 pip advance. As long as the price stays clear of the buffer zone between 1.75640 and 1.75850, and doesn’t close the day below that zone, the likelihood of a strong upward move increases.

EUR/AUD Daily Chart, Source: TradingView

Retail sentiment is 89% short, making this setup an excellent contrarian pick. The intermediate target is 1.78670.

Notes:

• AUD NZD: Continues to weaken but might find stronger support around 1.07230.
• AUD CAD: Started to descend lower, continuing the long-term bearish trend. Support is around 0.88.
• AUD CHF: Broke out of the bearish flag, has yet to decline decisively, but it is biased to the downside.
• AUD SGD: It remains in a range, with a slight bearish bias.
• AUD JPY:  Indecisive, owing to weakness of both pairs. The long-term trend is downward.
• CHF SGD: Still bullish bias, but failed to close above the key 1.57100 level. If it can bridge that gap, there is a potential for an upside move. However, traders pursuing multiple CHF trades should be aware of correlated forex pairs and adjust risk management accordingly.
• CAD JPY: Remains in a range, but it shows potential for reversing the trend and turning long-term bullish.
• EUR JPY: Rebounded back to the 163.830 resistance level, still remains in the long-term consolidation.
• EUR NZD: Remains range-bound without clear price action.
• GBP AUD: Broke higher to find liquidity around 2.10280. It failed to break higher, showing significant signs of exhaustion. The important support is below at 2.08380.
• GBP NZD: Showed signs of exhaustion, but until it breaks the strong support at 2.25120 and closes the day below that level, the bias remains to the upside.
• NZD JPY: Failed to create a new higher high, but yet to create a lower low. It will likely remain in a range until some news catalyst moves the price.

Disclaimer: Any opinions expressed in this article are not to be considered investment advice and are solely those of the authors. Singapore Forex Club is not responsible for any financial decisions based on this article's contents. We provide research and promote forex trading in Singapore, and readers may use this data for information and educational purposes only.