Binary bets of the week: The Week the BOJ Lit the Fuse Under the Dollar Rocket

by Dave Evans of binary.com

The Week the BOJ Lit the Fuse Under the Dollar Rocket

Last week was always set to be a busy one, with the US Federal Reserve formally ending its Quantitative Easing activities. As it turns out, this benchmark moment was superseded by other events, not least the Bank of Japan upsetting the apple cart with a major round of asset purchases.

The main driver on Thursday was a Hawkish FOMC statement accompanying the confirmation of easing policies coming to an end. This and better than expected US GDP figures were two significant factors in the dollar index pushing to its highest levels since June 2010.

Dollar Index Daily Chart:

They weren’t the only factors though, as a number of factors combined to create the perfect stormy for a sustained US dollar rally. Currencies of course do not operate in isolation and for the US dollar index to rise with such assurance, there needs to be corresponding weakness in its main exchange partners.

Euro soft and getting softer

The first of these is the euro which itself had a week to forget. German individual state inflation data came in softer than expected, an issue compounded by Germany wide inflation also dropping below expectations. Friday saw these figures confirmed, with below par German CPI flash estimate and German retail sales that slumped more than anticipated.

Meanwhile the epic Greek saga entered another chapter, with Hellenic bonds getting crushed on Thursday. Part of this was a reaction to the Fed, but other factors include concerns over 2015 presidential elections and renewed rumours of a removal from the Troika bailout scheme.

The Euro dropped to revisit recent lows. EUR/ USD daily chart:

Forex funds are now flowing firmly in the direction of the US dollar, especially with sustained weakness in the euro and yen. With the ECB still yet to fully activate its own Quantitative Easing plans, there could be further downside from here for the EUR/ USD especially with the euro’s main power house Germany spluttering.

The long term monthly chart of the EUR/ USD below shows how the EUR/ USD still has some way to go until the 2,000 lows are tested. We’ve been a long term seller of the euro for some time and see no reason to reverse this outlook now, especially in light of recent institutional activity. 

A good way to play this could be a LOWER trade on the EUR/ USD predicting that it will close below 1.2000 in 200 days time, returning 349% if successful. Or put another way, betting that the EUR/ USD will drop and close below 1.2000 on the 19th of May could return £44.85 for every £10 staked.

USD/ JPY Rockets Higher On BOJ Plans

The yen was the big mover on Friday morning after the Bank of Japan surprised many by announcing an aggressive round of easing activities. The move sent the yen pairs shooting higher, with the USD/JPY rising to its highest level in six years.

Another move, less widely reported, were plans to approve new allocation targets for the largest government pension fund in Japan. The plan aims to inject more money into the Japanese stock market and more importantly increase holdings in overseas equities and bonds by up to 21.5 trillion yen ($195 billion).

This move alone would be enough to shift further funds away from the yen and mostly into the US dollar. Not all of this movement will be reflected in Friday’s move, giving more upside potential for the USD/ JPY despite already surging at a rapid pace.

USD/ JPY daily chart:

A good way to play this is a HIGHER trade predicting that the USD/ JPY will close HIGHER than 114.00 in 90 days time for a potential return of 195% if successful. Or put another way, betting that the USD/ JPY will be above 114.00 at the close on January 29th could return £29.56 from every £10 staked.

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