After 'Wild Wednesday' the Australian dollar faces 'Freaky Friday' as traders wait for the BOJ

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The Australian dollar continues to gravitate around the 75 US cent level in early Asian trade on Friday — a level it has become all too familiar with in recent days — with the AUD/USD seemingly in a holding pattern before the release of today’s Bank of Japan monetary policy decision.

The AUD/USD finished Thursday trade buying .7500, leaving it fractionally above Wednesday’s close of .7490. The Aussie spent much of Thursday’s session higher, rising to as high as .7550 before easing lower over the course of US trade.

AUD/USD 5-Minute Chart

Some put the move down to broad-based US dollar weakness as a result of the US Federal Reserve’s FOMC policy statement, something markets interpreted as showing no clear indication that the Fed was looking to hike rates in the near-term. Although, given continued focus on the Bank of Japan meeting this week– an event where the markets expect policy action — one suspects it was movements in the USD/JPY that drove the broader moves in currency markets, including in the Aussie.

As soon as the USD/JPY opened it began to fall, pressuring the US dollar throughout Thursday’s Asian session.

Thankfully, after a whirlwind week of innuendo and speculation, the question as to what exactly the Bank of Japan will do today — if anything — is about to be answered.

“JPY will have a volatile session today driven by Japanese CPI inflation (9:30am Sydney) and more importantly the Bank of Japan (BOJ) meeting,” said Elias Haddad, senior currency strategist at the Commonwealth Bank.

“USD/JPY and AUD/JPY are vulnerable to a sharp sell-off if the BOJ ‘fails’ to live up to heightened expectations of further policy easing..

“According to a Bloomberg survey 32 of 41 respondents forecast the BOJ will ease monetary policy on Friday. Of the respondents looking for the BOJ to ease, 64% expect further cut to negative interest rates and 51% foresee an increase in the pace of monetary base expansion,” he added.

The CBA is looking for the BOJ to cut interest rates to -0.3%, taking it below the current level of -0.1%.

“Under such a scenario, USD/JPY and AUD/JPY can edge higher but upside will be brief and modest,” says Haddad. “In our view, participant disappointment and Japan’s large current account surplus will eventually re-strengthen JPY.”

Reflective of the diverse market views as to what exactly the BOJ will deliver, the National Australia Bank believes that it’s most likely that the BOJ will increase the size of its asset purchase program — currently around 80 trillion yen per annum — by purchasing more exchange traded funds and possibly more government bonds.

While there’s little doubt that the AUD/JPY will likely follow the lead of the USD/JPY once the policy decision is released, given the influence of the Japanese yen on the US dollar index, the AUD/USD could potentially move inversely to the gyrations in the USD/JPY. It certainly has this week already.

There is no set time for the BOJ decision, although it tends to arrive around 1pm AEST in Australia. The rule of thumb used by markets is that the longer it takes for the BOJ to make its announcement, the more likely it is that the bank has become more creative with its policy decision.

If there is a delay, expect market volatility to whip up as a consequence, with the USD/JPY likely to push higher as traders bet on the likelihood of additional policy stimulus.

After the fireworks of the BOJ decision, markets will also have to contend with the release of Q2 GDP figures from both the Eurozone and US.

The latter, in particular, has the potential to shake up currency markets. Economists are looking for a seasonally adjusted annual rate of 2.5%. It’ll hit the screens at 10.30pm AEST.

Here’s the current Australian dollar scoreboard, as at 8am AEST.

  • AUD/USD 0.7503 , 0.0003 , 0.04%
  • AUD/JPY 78.99 , 0.06 , 0.08%
  • AUD/CNH 4.9955 , 0.0015 , 0.03%
  • AUD/EUR 0.6771 , 0 , 0.00%
  • AUD/GBP 0.5700 , 0.0004 , 0.07%
  • AUD/NZD 1.0602 , 0.0004 , 0.04%

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