Week Ahead: Watch for Potential Volatility Before the Year Ends
With a lack of participation in the markets this week, forex traders and stock investors who need to “get things done” may be able to nudge the markets in one direction.
Last week, the Bank of Japan surprised markets and adjusted its yield curve control policy, which many traders took as a sign that this might be the beginning of the end of quantitative easing for the BOJ. As a result, yen pairs fell in the forex, the pair USD/JPY losing over 500 pips! The week ahead will be light in terms of economic data with the vacation week abbreviated in many countries. However, don’t expect 2023 just yet. With a lack of participation in the markets this week, traders and investors who need to “get things done” might be able to nudge the markets in one direction. Be prepared for possible volatility.
Bank of Japan
The Bank of Japan met on Tuesday last week to discuss interest rate policy. Monetary policy was to remain unchanged, as it has for so long now (with minor adjustments here and there). However, no one expected the Bank of Japan to adjust its control of the yield curve by widening the band for the 10-year JGB. . Yields can now fluctuate between +/-0.50% compared to a previous range of +/-0.25%. Although Governor Kuroda denied it was QT, markets were quick to take this as a message that this might be the “debut” of QT. Prime Minister Kishida had also said he would revise the 10-year-old statement that commits the Bank of Japan to hitting 2% inflation as soon as possible. Many expected this to happen following Kuroda took office in April. Was the decision to expand the YCC band due to pressure from Kishida? The governor of the Bank of Japan is due to speak on monetary policy on Monday. Any hint of QT might push the yen pairs further lower.
End of year
The last week of the year is usually when hedge funds, mutual funds, and pension funds close their books for the year or at least put things in order, if they haven’t already. . However, there are also occasions when a market or markets move aggressively in one direction, in what might generally be called a “Santa Claus rally”. This is mostly done when the street has suffered big losses for the year and needs to try to shake things up during the illiquid times at the end of the year. Often this is done with stock index futures, which are often used as speculative tools for large traders. But it might also be done in other futures and forex market. Watch for year-end volatility this week as traders close their books for the year.
Economic data
Many printouts of month-end economic data had been moved due to the holidays and the end of the year, such as the latest look at third-quarter GDP and Core PCE. Kuroda’s speech on Monday will be watched closely for hints of QE. Additionally, US housing data and the Chicago PMI will also be watched for signs of a slowdown. Other economic data to watch this week include:
Monday – December 26, 2022
Japan: Speech by BOJ Kuroda
Japan: Unemployment rate (DEC)
Japan: Retail Sales (NOV)
Japan: Housing starts (NOV)
Tuesday – December 27, 2022
United States: S&P/Case Schiller Home Price (OCT)
United States: Dallas Fed Manufacturing Index (DEC)
Japan: Pre-Shift Industrial Production (NOV)
Japan: Summary of BoJ Views
Wednesday – December 28, 2022
United States: Pending Home Sales (NOV)
United States: Richmond Fed Manufacturing Index (DEC)
Thursday – December 29, 2022
UK: BOE Consumer Credit (NOV)
UK: Mortgage Approvals (NOV)
Stocks of brut
Friday – December 30, 2022
UK: National Housing Prices (DEC)
Switzerland: KOF leading indicators
United States: Chicago PMI (DEC)
See ” Economic calendar
Forex chart of the week » USD/JPY daily
As mentioned above, the USD/JPY pair lost over 500 pips in forex on December 20 when the BoJ announced a change in its YCC policy. It was a -3.80% move and the strongest percentage selloff of the year. On September 22, the BOJ intervened and the pair fell -1.22%. On October 24, the BOJ intervened once more and the pair fell -1.65%. On November 10, the US missed CPI expectations and USD/JPY declined, this time by -3.72%. But it wasn’t until the BOJ changed its interest rate policy that the pair fell by the most percentage points for the year. However, the selling was halted at the August 2 lows and the 50% retracement from the year lows on January 14 to the year highs on September 28. Note that despite last week’s massive sell-off, the pair is still trading within the long-term downtrend channel it has adhered to since hitting yearly highs. First support is seen at the December 20th low at 130.56. Below this, the pair may fall to the 61.8% Fibonacci retracement level from the year low to the high at 128.17. Resistance is directly above at 133.62. Above there, price may move towards the upper channel trendline near 136.00 and then the December 20 highs at 137.48.
As many traders, hedge funds, mutual funds and pension funds wind down operations for the year, the last week of 2022 might be quiet. However, as the market will be illiquid, the remaining traders may be able to push prices higher. So, watch for a volatile year-end in forex! Manage risks appropriately.
Par Joe Perry, CMT, FOREX.com » Official site
Disclaimer: The information and opinions contained in this report are provided for general information only and do not constitute an offer or solicitation to buy or sell forex exchange contracts or CFDs. Although the information contained herein has been obtained from sources believed to be reliable, the author does not guarantee its accuracy or completeness, and assumes no responsibility for any direct, indirect or consequential damages which may result from the fact that anyone relies on such information.