Article / 29 January 2016 at 9:05 GMT

FX Update: BoJ shocks with negative rate action

Head of FX Strategy / Saxo Bank
Denmark
  • BoJ stuns by cutting deposit rate to negative 0.10%, JPY weakens
  • BoJ's cut into negative territory was entirely unanticipated
  • Cut was mostly aimed at weakening JPY and curbing speculation of stronger JPY
  • FX markets now looking for equilibrium after the initial shock in JPY crosses
Japanese yen
 The yen weakened and risk appetite rebounded on the Bank of Japan's 
surprise rate cut into negative territory. Photo:iStock


By John J Hardy

Bank of Japan Governor Kuroda was known for liking to surprise the market, and he did so again overnight with an entirely unanticipated move into negative territory – cutting the rate for deposits with the central bank to -0.10% (though in a complicated, three-tier system ). 

The reaction unfolded in zany fashion, but by the end of the session, it was clear that this was negative for JPY at least in the short term. What is not clear is how the BoJ expects this to help the Japanese economy. Negative rates are hard on banks, and bank credit is the lifeblood of modern economies, together with fiscal outlays.

Furthermore this move could prove disruptive for the BoJ’s own quantitative and qualitative easing policy, as it makes it more attractive for banks to hold Japanese government bonds rather than selling them to the BoJ only to suffer negative yields. Of course, the move was mostly aimed at weakening the JPY by discouraging speculation of JPY strengthening, making it less attractive to hold JPY and possibly increasing interest in capital flowing out of the country to invest in higher yielding currencies/foreign bonds. 

Today's focus will be on where we find equilibrium after the initial shock in the JPY crosses and whether this is enough to provide a further tailwind to the attempted comeback in global risk appetite. Along those lines, look for today’s US Q4 GDP report as a setup to next week’s crucial US data (PCE inflation Monday, ISM’s Monday and Wednesday, and Friday’s jobs report).

Somehow this BoJ move looks like desperation and ineffective, last-ditch defense, and I’m not so sure that we get a sustained move on the back of it, certainly not for global risk appetite. The tricky part will be to define “sustained” – a few days to a couple of weeks is my expected time frame.

USDJPY

Note that the USDJPY rally topped out around the 200-day moving average (near 121.50), and we’ll be looking at closes above the Ichimoku daily cloud a bit lower and then the 121.50 level for whether this can develop into another test of the top above 125.00.
usdjpy
 Source: Saxo Bank

The G-10 rundown

USD: The USD is underperforming on the risk-on vibe and the assumption that the Fed is fast folding its rate hike plans and we’re trying to re-engage the 2010-14 celebration of central bank liquidity provision. This will abort at some point, but the timing is uncertain, and the USD could remain weak if next week’s key data are soft.

EUR: Terrible CPI data out of Spain today! The euro is benefiting relative to the JPY as the BoJ’s cut was certainly not priced in, but softer versus the USD, because of risk-on sentiment, and due to the last shreds of the Fed/ECB central bank policy divergence story. Note the first estimate of US Q4 GDP is up later today, which weighs more heavily than it should.

JPY: Sharply weaker on the shock move. The action so far has stalled around the 200-day moving average in USDJPY up near 121.50. The key from here is whether this BoJ cut is enough to trigger risk-on contagion globally or whether markets have given up on the diminishing returns of central bank policy. Color me skeptical.

GBP: Continues to mount a comeback in this environment as the recent speculative short looks in danger of a further squeeze as long as global risk sentiment continues to recover. Will also be difficult for the BoE to surprise to the dovish side next week – though by then, we may be trading at far different levels than the current ones.

CHF: EURCHF touched 1.1100 yesterday, and the BoJ move certainly doesn’t seem to have affected the CHF weaker theme – the spike overnight was likely due to liquidity hiccups over the BoJ decision. 1.1000 remains the key support for EURCHF longs, and USDCHF is a chopfest until we get a clearer USD signal.

AUD: The AUD has been one of the prime beneficiaries of the BoJ's cut overnight, as risk-on “high yielders” are benefitting the most at the moment. The rally in AUDUSD needs to remain above the 0.7100 level and then firmly take out 0.7170 to maintain credibility and possibly shift the focus structurally higher.

CAD: The 1.3980 area in USDCAD is trying to hang in there for support, but doesn’t’ have much of a chance if oil prices keep rising on rumours/talk of potential supply cuts. Risk-on sentiment is also a potential boost, and the next support level is 1.3800. Note that a Canada GDP miss today could tear the focus away from crude oil for a round or two.

NZD: Kiwi bounced hard on the BoJ cut, likely on general positioning offsetting and the possible popularity of NZDJPY shorts before this move. Still looking negatively on the kiwi, though it may remain firm as long as risk sentiment looks positive.

SEK: Nothing to excite here – seems to have a low beta response to the situation until some new theme intervenes.

NOK: EURNOK looking more determined to the downside on the combination of risk-on sentiment and higher oil prices. A plunge and close well through the last important retracement at 9.34 suggests it may be trying to build a top for the cycle.

Economic Data Highlights
  • UK Jan. GfK Consumer Confidence out at 4 vs. 1 expected and 2 in Dec. 
  • Japan Dec. National CPI ex Fresh Food and Energy out at +1.3% YoY as expected and vs. +1.2% in Nov. 
  • Spain Jan. CPI out at -1.9% MoM and -0.3% YoY vs. -1.5%/+0.1% expected, respectively and vs. 0.0% YoY in Dec. 
Upcoming Economic Calendar Highlights (all times GMT)
  • Norway Dec. Retail Sales, Jan. Unemployment Rate (0900) 
  • Euro Zone Jan. CPI Estimate (1000) 
  • Canada Nov. GDP (1330) 
  • US Q4 Employment Cost Index (1330) 
  • US Q4 GDP First Estimate (1330) 
  • US Jan. Chicago PMI (1445) 
  • University of Michigan final Confidence (1500) 


— Edited by John Acher

John J Hardy is head of FX strategy at Saxo Bank

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