Bank of Japan stuns markets with negative interest rate move
29/Jan/2016 • Currency Updates•
Businesses with exposure to the Japanese Yen woke up to a surprise this morning. The Bank of Japan stunned global markets during Asian trading by announcing it would be cutting its interest rate on deposits into negative territory.
The interest rate was slashed to -0.1%, with further cuts on the table ‘if necessary’. The shock move sent the Yen over 2% lower against the US Dollar at one stage and comes in a bid to stimulate the struggling Japanese economy.
The BoJ decision, while surprising, fully validates our out-of-consensus view of the Yen, and we continue to expect further weakening of the currency throughout the year.
Sterling rallied against its major peers yesterday as mildly encouraging growth data painted a slightly more upbeat picture of Britain’s overall economic outlook. The UK economy expanded by an improved 0.5% quarter-on-quarter in the three months to December, a modest uptick on the 0.4% registered in the third quarter of last year.
The figures ease, albeit far from eradicate, concerns of a sharp economic slowdown in the UK amid the recent global economic downturn. Of real concern is the UK’s continued dependence on its dominant services industry, which was the only industry to experience positive expansion in the final quarter of 2015.
A plunge in durable goods orders sent the US Dollar lower yesterday. The fairly abysmal figures support the view of a moderate slowdown in the US economy and don’t bode well for this afternoon’s growth figures, which are expected to show the US suffered from a marked slowdown in the fourth quarter.
In emerging markets, the South African Reserve Bank increased its benchmark interest rate by 50 basis points to 6.75% yesterday afternoon. This move was expected, as part of the central bank’s bid to calm inflation and counter a worsening growth outlook. The Rand strengthened on the news, ending the session as one of the world’s best-performing major currencies. We expect this trend to continue after its recent excessive sell-off.
Major currencies in detail:
The Pound strengthened by 0.7% against the US Dollar yesterday.
Despite the modest rebound in quarter-on-quarter growth, the annual pace of economic expansion remained soft, according to yesterday’s data. Annual growth was its slowest in nearly three years at 1.9%, with effects of a China-led global economic slowdown and weakness in the Eurozone clearly continuing to weigh heavily on the UK.
The economy is expected to remain under pressure this year, with ‘bumpy times ahead’, Chancellor George Osborne warns.
On a more positive note, Britain remained one of the fastest-growing developed nations in 2015, far outpacing the Eurozone.
No economic data today means that Sterling will likely be driven by announcements elsewhere.
The single currency soared by 0.7% against the Dollar yesterday, boosted by Thursday’s weak US data.
Euro-area confidence fell to its weakest level in five months in January. The latest economic sentiment index from the European Commission fell to 105 from 106.7, with spill-over from turbulent financial markets dampening confidence across the board.
Meanwhile, there was some mixed inflation data in Germany. Consumer prices fell by 0.8% in the month to January, although rose on an annualised basis by an improved 0.5%.
Eurozone-wide inflation data will be released at 10:00am UK time this morning, with any negative surprises likely to support the claim that the European Central Bank should expand its monetary stimulus measures in the coming months.
The latest durable goods orders figures were a massive disappointment on Thursday and will not be good news for Federal Reserve hawks, following the distinctly mixed FOMC statement on Wednesday evening.
Orders plunged by a massive 5.1% in December, its largest decrease all year. This ensured that overall orders for 2015 tanked by 3.5%, the first annual decline in demand for long-lasting manufactured goods since 2009 when the economy was emerging from a deep recession. Pending home sales also came in under expectations, inching higher by just 0.1% in December.
As a result, the US Dollar fell during the London session, ending 0.5% lower against its major peers.
Growth figures will be the focus during trading today, set for release at 1:30pm UK time. The data is expected to show that the US economy slowed to less than 1% growth on an annualised basis.
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