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FX Update - JPY plummets after shock BOJ easing

Written by Ian Dobbs on February 2nd, 2016.      0 comments

2:00pm(NZT)
The Bank of Japan (BOJ) delivered a real surprise to markets on Friday afternoon with further monetary easing. The move to negative interest rates was not expected and as a result the JPY lost significant ground across the board. The BOJ are the latest in a string of central banks so far this year to either ease outright, or signal further easing’s are coming. The ECB did just that a couple of weeks ago and last week the RBNZ did the same adopting a strong easing bias. In the US the Fed have recently dialed back expectations for future rate hikes and the market is now only pricing in slightly more than one interest rate hike this year. Attention now turns to the Reserve Bank of Australia (RBA) who release their rate statement this afternoon. However, the market may be disappointed if they are expecting too much of a change in stance from the RBA’s current ‘on hold’ position. The Australian central bank will likely acknowledge the weaker global outlook, but domestically we have seen decent data from Australia recently, in particular that of employment and inflation.
 

Australia
Trade in the AUD has been relatively quiet so far this week after Friday’s surge where the AUD, like the NZD, took a lift on the back of the surprise decision by the BOJ to cut interest rates. The ‘risk on’ sentiment which ensued help lift the AUD to levels last seen in early January. Earlier in the day credit data for December showed a lift from the month prior and continued moderate growth overall, the numbers showed a slowing in lending to property investors relative to owner occupiers. Inflation data released during the week topped the consensus forecasts, although the seasonally adjusted core measure for the quarter matched expectations. Of immediate interest for the AUD is today’s RBA interest rate decision (2.30 pm AEST). The market expects rates to remain on hold for the eighth consecutive meeting- which saw rates last lowered in May 2015. Trade data due for release tomorrow is forecast to show another sizeable monthly deficit as lower commodity prices continue to hit export earnings. Friday will see the release of the Q4 retail sales data and the important RBA statement on monetary policy.
 

New Zealand
Trade has been quiet so far this week, after the flurry higher seen on Friday post the BOJ interest rate meeting which saw the Japanese central bank adopt negative interest rates for the first time. The surprise decision spurred covering of short (sold) USD’s positions and in turn bolstered ‘risk on’ positioning which saw equity and commodity prices rally. The lift in the NZD was relatively short lived and came on the back of last week’s hangover from the RBNZ’s dovish monetary policy statement on Thursday. The NZD lifted in overnight trade on the back of more soft U.S. data having earlier taken the weak Chinese manufacturing PMI data in its stride. Key events in focus locally this week include the next GlobalDairyTrade auction (tonight), currently futures pricing predicts another decline in milk prices. This will be followed by tomorrow’s NZ Q4 employment report where employment growth is forecast to rebound in the December quarter from September’s surprisingly weak numbers. The unemployment rate is expected to tick higher on the back of growth in the labour force which has outpaced jobs growth. A speech later in the day by the RBNZ Governor will be watched for any additional clues on the RBNZ’s thinking on monetary policy.
 
 
United States
The US dollar has eased so far in trade this week after closing last week near its highs. This came despite a miss in the U.S. Q4 GDP data on Friday, although the market was well braced for the print given the growth comments from the FOMC the day prior. The data was helped by its composition which was driven by increased consumer spending and a reduction in inventories. Other data released included a boost in Q4 private consumption and a much better than expected Chicago PMI print. The Michigan consumer sentiment and expectation series both posted declines from the month prior, although the current conditions number posted a small rise. The key FOMC meeting on Thursday struck more dovish notes that that issued at the prior meeting after the Fed took heed of the recent economic and financial market developments and moderating U.S. growth. Data released overnight included a miss in the manufacturing PMI and ISM manufacturing PMI prints. The busy data week in the U.S. will peak on Friday with the release of the January non-farm payrolls employment report where the market is currently expecting the addition of 190k jobs for the month and a steady 5.0% unemployment rate.
 

United Kingdom
The GBP has shot higher in trade so far this week after data released overnight which showed a solid rebound in the U.K. manufacturing PMI in January and new orders, which expanded for the 35th consecutive month. Trading finished on a soft note last week after sentiment took a dent post the comments from BOE Governor Carney which further reduced expectations for a rate hike. Market expectations are now not pricing in a full hike until 2018, although some further clarity on the BOE thinking should be evident after this week’s central bank meeting on Friday. Other data of note last week included a slip in the CBI industrial trend total orders data and disappointment in the Nationwide house price index release. Of immediate interest will be the U.K. construction PMI release for January, slated for release tonight prior to the services print tomorrow.
 

Europe
The EUR has ratcheted higher in trade overnight on the back of improved demand in part on the back of U.S. data, which on the whole underwhelmed. The Euro closed last week out near its lows for the week after Friday’s euro-zone inflation numbers, which despite beating expectations, showed inflation running at levels which will continue to concern the ECB. President Draghi’s recent comments that included ones which said he was monitoring other central bank action may have added to the soft trading tone after the BOJ easing on Friday, this as the market mulls the likelihood of further ECB policy action. Data released last week included a worse than expected German IFO business sentiment print and negative inflation number for January. Declines in manufacturing and economic confidence were observed in the latest euro-zone data. January Markit manufacturing PMI data released overnight showed a sharp lift in the Spanish numbers, a miss in the Italian numbers was offset by an improvement in the German print. The French numbers remained unchanged from the month prior in neither expansion or contraction territory. The services and composite data are set to feature later this week.
 

Japan
The JPY sits significantly lower since our report on Friday after the shock easing by the BOJ later in the afternoon. This saw the central bank adopt a negative interest rate for the first time in an effort to jumpstart the Japanese economy out of years of stagnation. The new -0.10% rate is to be applied mainly to new reserves created from the middle of February. Many in the market saw the move as being aimed at weakening the JPY, given that the rate will apply to a small amount of bank reserves only. No further change in the quantitative easing programme was announced (80trn P/A). The heavy data schedule released just prior included a larger than expected decline in industrial production and household spending and further soft inflation data. This only served to further frustrate the speculative net long JPY positions which had only recently reached 4 year highs. The calendar for this week is quiet in Japan, although the JPY is likely to remain under pressure after last week’s move especially in light of Governor Kuroda’s promise to move rates further into negative territory should it be necessary.
 

Canada
The CAD has continued its recent run of strength in overnight trade, this despite oil prices which again saw decent declines. Data released on Friday dominated the local news calendar for the week. It included November GDP which printed in line with expectations, a decline in the raw materials price index and a further decline in the latest read of pricing for the major commodities sold by Canadian manufacturers. This week is a quiet one data wise for the CAD until Saturday morning when employment/ trade data for January and the Ivey PMI will be released. Oil news flow will continue to be a key driver, although last night’s decoupling of the CAD/Oil relationship indicates renewed enthusiasm by CAD bulls after last month’s dramatic decline saw prices reach some 6.3% below opening 2016 levels at their crescendo.
 

Major Announcements last week: (Tuesday only)
  • German Business Climate  IFO, 107.3 vs. 108.4 exp.
  • US Consumer Confidence, 98.1 vs. 96.5 exp. (Jan).
  • Australian Q4 inflation, 0.4% vs. 0.3% exp.
  • US FOMC, on hold, reducing market rate hike expectations.
  • NZ Cash rate, on hold 2.5%, easing bias.
  • UK Q4 GDP, 1.9% y/y as exp.
  • US Durable goods orders, -5.1% vs. -0.6% exp. (Dec.)
  • BOJ Interest rate decision, -0.1% vs. 0.1% exp.
  • US Q4 GDP, 0.7% ann. vs. 0.8% exp.
  • Canadian GDP, 0.3% as exp. (Nov.)
  • US Chicago PMI, 55.6 vs. 45.0 exp. (Jan).
 

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