Yen strengthens as expectations fall

USD/JPY fell sharply on Tuesday, as expectations that the BOJ will carry out a massive stimulus package diminished ahead of the central bank’s meeting.

USD/JPY fell sharply on Tuesday, as expectations that the BOJ will carry out a massive stimulus package diminished ahead of the central bank’s meeting.

The Nikkei index ended the day 1.4% lower as a result. This morning USD/JPY has rebounded to the 105 area but the potential risk that the BOJ will hold fire again still looms, and traders tend to take fewer risks amid cautious sentiment. 

The Hang Seng Index rallied 0.6% to 22,129 points, reaching a seven-month high. The gain was mainly attributed to the strong performance of the casino and gaming sector (+6%), in which Sands China was leading a rally among Macau casinos. Its share price jumped as much as 7.6% as investors saw signs of a turnaround in the Chinese gambling hub. 

Singapore’s Straits Times Index was facing pressure as the dismal economic outlook and low oil prices loomed over the 2Q earnings results. The three local banks retraced from recent highs after analysts warned against a profit squeeze and risks of rising non-performing loans. 

Volatility has fallen to the lowest level since the Brexit shock. The Volatility Index - a gauge of “peacefulness” of the general market - is currently trading in the low-teens, which can be used to hedge against potential turmoil that the BOJ and FOMC could bring to the market in the coming days. 

Gold and silver have rebounded mildly following the yen’s surge. The immediate support levels are at $1,286 and $18.50 respectively. 

Crude oil prices extended losses and deepened a three-month low towards $42.70. Traders are waiting for the US weekly DoE inventory data to paint a clearer picture of the demand-supply relationship. 

The FOMC will announce the policy rate decision at 2:00am tomorrow morning. The market have almost priced in a near-to-zero chance of a rate hike in July. But the potential risks include a hawkish statement towards a possible rate hike by the second half of this year, which will bring more turbulence.

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