Asian markets could trade mixed following sideways trade on Wall Street after disappointing earnings from Goldman Sachs, where it missed on profit, with traders now braced for the widely expected Bank of Japan policy decision. The Yen steadily reversed its losses amid market positioning heading into the Bank of Japan policy announcement with increased speculation for a possible hawkish surprise. Most discussion on the BoJ rests on whether there will be further tweaks to the Yield Curve Control framework or a complete abandonment of the policy altogether.
The Yen should be watched closely to guide correlated flows on Bonds and Equities. A non-change outcome from the BoJ may induce a strong price action move to the upside in USD/JPY. But it is worth noting that traders could use this as an opportunity to replenish shorts due to heavy market positioning around the event. Options markets imply moves of approximately 275 pips on either side to cover the risk premium on some options structures.
On the macro front, tailwinds for risk assets in China should be expected after better economic data. After the positive reading from China, oil prices traded higher as China’s Q4 GDP fell less than expected, while industrial output growth for December also dropped less than feared. As COVID infections ease with China’s support to the economy, a potentially lower US Yield and a weaker dollar in the coming quarters, traders could increase risk in Chinese assets with a better economic outlook starting to become consensus.
