Better late than never, said the post-Fed volatility reset that sent the S&P 500 (SPY) up about 1% at the open and then did nothing else for the rest of the day. I guess the great news for the bulls is that the VIX 1-Day managed to finish the day at 13, so there will be some vol to crush again overnight into tomorrow. The moral of the story is that if the market rallies again tomorrow, albeit to a lesser degree, I wouldn’t be surprised either.
That being said, today’s trading pattern isn’t overly bullish either, with the gap higher following the sharp drop into the close on September 16. Those types of patterns tend to be unstable, with gaps often filling fairly quickly. Overall, a volatility-unwind rally probably doesn’t have a long lifespan, so if the rally continues tomorrow, it may be somewhat short-lived.
In the meantime, tonight is the highly anticipated rate decision from the Bank of Japan. I think it would be a really bad idea for the BOJ to pass on raising rates, and for that reason, I think it will hike. I also think it will signal that more rate hikes are coming and, more importantly, potentially at a faster pace. Japan’s 10-year breakeven inflation rate is at 2%. What more could the BOJ possibly want? It is time for it to hike.
The AUD/JPY probably matters more than the USD/JPY at this point, given its carry-trade positioning. For now, support has held, but a hawkish BOJ that signals more rate hikes could result in the AUD/JPY breaking below support at 110 and potentially moving sharply lower. That would likely be a negative for risk assets globally. This is probably the most important chart to watch over the next few days, particularly following the BOJ meeting.
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