- The Nikkei 225 is sitting at a major support level currently, as it waits for the Bank of Japan monetary policy statement coming out early on Tuesday.
- The market is speculating that the Bank of Japan will continue to keep monetary policy capped at 50 basis points on the 10-year JGB, setting up a major showdown.
- After all, it seems like currency and bond traders are doing everything they can to break the Bank of Japan, and somebody somewhere is going to lose.
Keep in mind that the Bank of Japan is stuck here. They can either try to keep interest rates down, stimulating the economy, and perhaps more importantly, keeping debt relatively cheap, or they will have to let the yen rise in value. They have no other path forward. This is a one over the other type of situation, culminating 20 years or so of extreme manipulation by the Bank of Japan.
I Remain Cautious
Quite frankly, there are other central banks out there that will be crushed as well if this starts to really get going. Hello, Switzerland. However, in the meantime, we will have to look at this through the prism of what the announcement is, and where the Nikkei 225 settles. If it settles below the ¥25,500 level, I believe at that point I will start shorting. On the other hand, if we rally from here then you must look at the area between here and ¥26,500 as a potential consolidation area.
I know a lot of people don’t trade the Nikkei 225 in various parts of the world, but this might be a market worth paying attention to. If the yen suddenly strengthens, and it very well could as we have seen the on-the-run, or most current, 10-year yield settles above the 0.5% ceiling and the generic 10-year not trading below the 0.5% level since January 5, then a stronger currency will be like kryptonite for the Nikkei 225.
In other words, the next huge move in Japan is probably going to be decided rather quickly. Once that kicks off, it could be a significant move as well, so definitely keep your eye on what we have in this index, because it presents an opportunity that could be more of a cyclical one and less of a short-term trade.
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