Week in Review: BoJ takes rates negative

Jan 29, 1:44 pm
yen_BoJ

This week witnessed three Central Bank meetings, all of which failed to impress the markets. The Federal Reserve’s first meeting this year saw the Fed strike a cautious tone to its language indicating that the Central Bank was monitoring the global developments, the oil glut, and inflation. The labor market was the only thing going in favor of the Fed, warranting interest rates at the 0.25% – 0.50% band. However, the Fed did not rule out a March rate hike meaning that a lot could happen between now and then.

The markets continued to chop around unsure between the risk on and risk off mode. The RBNZ’s monetary policy saw the Central Bank holding off rate cuts at this week’s meeting but signaled that further rate cuts might be needed while expressing the need to see a weaker NZD against a basket of currencies.

The surprise this week, however, was from the Bank of Japan which took interest rates into the negative; a new trend which follows the ECB, SNB and other European Central Banks and one which the Bank of England and Bank of Canada were exploring too. BoJ’s decision managed to weaken the Yen but only to an extent. The US Dollar touched a session high to ¥121 before easing back lower into the NY trading session. The equity markets which also rallied on the BoJ’s decision started to ease back. The BoJ noted that inflation could take longer than expected to reach its target rate of 2.0%, postponing the timeline from April 2016 to 2017.

[Tweet “Dollar touched a session high to ¥121 before easing back lower into the NY trading session”]

On the economic front, Australia’s quarterly inflation numbers managed to come out better than expected, with the trimmed mean CPI rising 0.60% for the fourth quarter of 2015. The Aussie managed to make strong grounds this week against the US Dollar which was significantly weaker. In the US, durable goods orders posted the sharpest monthly contraction since August 2014, falling -1.20% while latest economic data for the fourth quarter of 2015 saw the US economy expand at a softer pace of 0.70% below estimates of 0.80% dragged by a stronger US Dollar and weak Oil prices.

In the UK, the preliminary GDP data matched expectations, rising 0.50% in the fourth quarter but posted a decline on a yearly basis. The Pound Sterling which was trading weaker the past few weeks managed to stage a turnaround after posting a weekly low to 1.417. GBPUSD is currently up 0.14% for the week at the time of writing after the Cable erased the gains failing to break above 1.44 handle.

In Eurozone, inflation estimates showed the core inflation rising 1.0% against estimates of 0.90%. The headline inflation although remained unchanged at 0.40%. The Euro is seeing a stronger week, having gained as much as 1.0% for the week against the buck. EURUSD is currently trading at 1.09.

The commodity markets are seeing a positive week. WTI Crude Oil futures are up 0.90% for the week after testing a weekly high to $34.50 a barrel. Oil prices gained this week, mostly on market chatter that Russia and Saudi Arabia were planning coordinated production cuts to Oil. However, the rumors were dismissed by Saudi officials. It does, however, stress the fact that Oil producing nations are increasingly coming under pressure on low Oil prices. Oil markets shrugged off the large increase in commercial stockpiles in the US this week and continued to edge higher.

Gold prices were volatile this week as the safe haven turned choppy after nearly two weeks of gains. Prices in Gold touched monthly highs above $1120 an ounce before easing back just a day after the Fed’s decision. Gold prices are likely to remain bullish in the near term as long as prices are supported above the $1100 handle.

Economic events this week

  • CPI q/q 0.40% vs. 0.30%; Trimmed mean CPI q/q 0.60% vs. 0.50%
  • Crude Oil inventories 8.4Mn vs. 3.8Mn
  • Fed leaves interest rates unchanged at 0.25% – 0.50%
  • RBNZ leaves cash rate unchanged at 2.50%
  • UK Preliminary GDP q/q 0.50% vs. 0.50%
  • US Core durable goods orders m/m -1.20% vs. -0.10%; Durable goods orders m/m -5.10% vs. -0.60%
  • BoJ cuts interest rates to -0.10%
  • BoJ Core CPI y/y 1.30% vs. 1.30%
  • Eurozone Flash CPI y/y 0.40% vs. 0.40%; Core CPI flash y/y 1.0% vs. 0.90%
  • Canada GDP m/m 0.30% vs. 0.30%
  • US Advance GDP q/q 0.70% vs. 0.80%
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John has over 8 years of experience specializing in the currency markets, tracking the macroeconomic and geopolitical developments shaping the financial markets. John applies a mix of fundamental and technical analysis and has a special interest in inter-market analysis and global politics.

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