Trading Bank Of Japan Negative Interest Rate Announcement

Bank of Japan surprised the markets today with its negative interest rate decision. USDJPY shot up more than 300 pips on the BOJ announcment. What does negative interest rates means?

Markets were surprised. BOJ had previously announced that it wont make the rates negative.

The central bank released a question-and-answer format statement to explain the new system. In response to the question of how low the negative rate could go, the bank didn’t provide a clear reply, yet said that similar multi-tier systems are used in Switzerland, Sweden and Denmark, which have negative rates of minus 0.75 percent, minus 1.1 percent and minus 0.65 percent, respectively.

So this is the first time a central bank has made the interest rates negative. Negative interest rates means that BOJ would be paying the depositors in theory. In practice a three tier system has been developed and implemented. The central bank said the Japanese economy was in the midst of a moderate recovery, but it expressed concerns about plummeting oil prices and the uncertain outlook for emerging economies, especially China.

Negative interest rates may become a norm now. ECB is also facing the same problems as BOJ. ECB stimulus was meant to fight deflation in the Euro zone. Interest rates are almost zero in the Euro zone. ECB can also follow BOJ in the future if it thinks that things are not working. So how did the markets react to this negative interest rate initiative by the BOJ?

It’s the last trading day of January and it’s off to a positive start thanks to a surprise move by Japan’s central bank. Stocks surged in the Tokyo Stock Exchange when the announcement was made. This was a background. Yesterday when we checked Forex Factory Economic News Calender, we found a Monetary Policy Statement scheduled by the BOJ. As retail trader we don’t need to know what is going to be announced. Most of the time when the Monetary Policy statement is made by the central bank, it suprises the market. Remember the Swiss Surprise around the same time last year that ripped the markets upside down. Now we don’t expect this to happen everytime. Sometimes the markets don’t show any surprise at all and stay calm. Take the case of the recent FOMC Meeting Minutes release. Now let’s look at the USDJPY M15 chart.

USDJPY

The red arrow shows the entry. Just 2 hours before the news announcement. Entry was 118.624 and the stop loss is 118.500. The risk is only 22 pips. Take profit is 120.624. Take profit got hit within 5 minutes of the announcement. In news trading it is always a good idea to choose a take profit wisely before hand. There are only 2 options. Either the stop loss gets hit or the take profit target gets hit. This time it was the take profit target.

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