THE TAKEAWAY: The Japanese Yen may rise as the Bank of Japan disappoints forex markets’ bets on an aggressive stimulus expansion.

In the lead up to the Japanese election, the dollar/yen saw a significant rally as those participating in the so-called ‘Abe Trade,’ bet on Shinzo Abe winning the election and achieving a mandate to implement monetary and fiscal stimulus plans. Since Abe’s win, the focus has shifted to this week’s Bank of Japan’s two-day monetary policy meeting. Incoming Premier Shinzo Abe has encouraged bold action in an effort to end Japan’s 15 years of deflation.

Economists are expecting the BOJ to expand stimulus efforts by 10 trillion Yen, which some central bank officials say may not be large enough to discourage political pressure (according to newswires). For his part, Shinzo Abe has called for ‘unlimited’ easing to achieve a 2 percent inflation target, double the BOJ’s current 1 percent objective. However, with the new LDP government in office for just a few days, significant policy changes may have to wait until the new year. Furthermore, the BOJ could be held back this time around to avoid giving the impression that it is not in control of monetary policy and solely acting at the behest of the government.

On the technical front, our Strategist Ilya Spivak points out that, “Prices gapped higher in the wake of Japan’s general election and promptly corrected lower, breaking through the 138.2% Fibonacci expansion at 83.97 to target the 123.6%level at 83.45. A further push below that exposes the 100% Fib at 82.61. The 83.97 level has been recast as near-term resistance, with a reversal above that targeting the 150% expansion at 84.39.”

Daily Chart - Created Using FXCM Marketscope – Prepared by Ilya Spivak

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