Week in FX BOJ Shock to Pressure Central Banks

The Bank of Japan Cut Interest Rates into Negative Territory Putting Other Central Banks on the Spot

The Bank of Japan (BOJ) announced that it would apply a negative 0.1 percent rate to excess reserves starting February 16. The policy decision is a token as it would only apply to a limited set of funds, but the signal it sent was felt across the FX market. The JPY depreciated against all pairs with high yielding currencies being the biggest winners like the South African rand (ZAR). Stock markets welcomed the news with the financial sector not enjoying the benefits as it pushes investors away from savings and bonds. The move by the BOJ is seen as putting pressure on other central banks to step up their monetary policy actions.

Major central banks stood in the sidelines in January before the BOJ delivered the shock announcement. The decision from the BOJ to move away from quantitative easing into more unconventional tools will pressure other banks into unfamiliar territory. The Reserve Bank of Australia (RBA) is set to announce its rate statement on Monday, February 1 at 10:30 pm EST. The Bank of England (BoE) will host another Super Thursday with the release of the inflation report, the monetary policy summary, the official bank rate and the MPC votes on Thursday, February 4 at 7:00 am EST.

Employment continues to be the most resilient component of the U.S. economy. The number of jobs has risen continuously to pre–2008 levels, the market will be focused on wage growth to keep boost confidence in the recovery of the American economy. The U.S. non farm payrolls (NFP) report will be published on Friday, February 5 at 8:30 am EST.

Bank of Japan Delivers Negative Rate Surprise

BOJ Governor Haruhiko Kuroda surprised markets again with a negative rate announcement on Friday. The central banker was recruited by Prime Minister Shinzo Abe to lead the charge to make its lofty 2 percent inflation goal a reality almost 3 years ago. Back then the BOJ announced a massive stimulus package that depreciated the JPY. The slowdown in global markets and commodity prices keep deflationary pressure high. On Halloween 2014 Kuroda again shocked markets with an expansion of quantitative easing. When Halloween 2015 was coming around and the Japanese economy was not gaining enough traction there was heavy anticipation that another intervention was needed. Negative interest rates were a topic of discussion back then, but Mr. Kuroda dismissed them as central bank was confident that the economy was on the mend.

The BOJ did not add any stimulus in 2015 and the rapid decline in the price of oil and the Chinese stock market turmoil have forced the hand of the central bank. The decision did not come easy as the vote was 5-4. Given the fiscal deficit that has drawn warnings from the International Monetary Fund (IMF) and the Wold Bank the costs of a QE program do not justify the results. It was time for a more unconventional measure.

The main problem with QE programs around the world is turning out to be corporate spending. Liquidity has been added to financial institutions who passed that on to corporates. Low rates have boosted stock market returns and consumer spending in the housing sector. Jobs have returned, but wages remain low. The Abe government has tried via multiple channels to get corporate Japan to raise wages, and while they remain onboard in spirit, they have not invested due to the current climate. The goal of the BOJ with negative rates is to calm the markets and boost investment at a lower cost to its coffers. The immediate reaction shows that this move has worked, but its still too early to say if it will have long term effects given the limited funds to which the negative rate will be applied to.

The USD/JPY appreciated 2.03 percent in the last 24 hours. JPY pairs have been the biggest losers as across the board they have depreciated as was the intention of the BOJ. USD/JPY is trading at 121.16 after reaching a session high of 121.60

Bank of England Super Thursday to Keep Rates Unchanged

The Bank of England (BoE) will be one of the few major central banks seeing any action on February. The BOE and the Reserve Bank of Australia (RBA) will release rate statements in the first week. The Riksbank will follow suit on February 11.

The BoE will host another Super Thursday with the release of the inflation report, the monetary policy summary, the official bank rate and the MPC votes on the rate decision. The inflation report is likely to show a dovish tone after the economy has posted disappointing numbers. The effect of lower oil prices on inflation has zapped all the forward momentum that at one point had the U.K. central bank in the lead to announce a rate hike. There is no rate change expected from the Old Lady on Thursday. The vote count could be one of the biggest points as is has stood 8-1 in favour of leaving the rate unchanged, but as the global economic conditions weaken, the lone dissenter Ian McCafferty might rejoin the pack although that might prove to send a strong dovish message if he does.

NFP to Keep U.S. Economy on Track

U.S. gross domestic product (GDP) data for the fourth quarter was released on Friday and it showed a slower pace of growth at 0.7 percent. Consumers are a huge driver of the U.S. economy and with rising savings rates and lower energy costs there should be higher consumption numbers if the jobs numbers keep adding to a healthy recovery. The issue seems to be with the quality and wages of those jobs that keep pushing the NFP to able 200,000 every month. The U.S. added 851,000 jobs in the fourth quarter, yet the economy did not impress as consumers did not spend. This type of behaviour is why the Fed abandoned its single focus on the headline NFP number and instead focused on all the components of the job report.

The U.S. added 292,000 jobs in December and another above 200,000 number is expected in the January report to be published on Friday, February 7 at 8:30 am EST.

Forex Market events to watch this week:

Sunday, January 31
8:00pm CNY Manufacturing PMI
8:45pm CNY Caixin Manufacturing PMI
Monday, February 1
4:30am GBP Manufacturing PMI
10:00am USD ISM Manufacturing PMI
11:00am EUR ECB President Draghi Speaks
10:30pm AUD Cash Rate
10:30pm AUD RBA Rate Statement
Tuesday, February 2
4:30am GBP Construction PMI
4:45pm NZD Employment Change q/q
6:45pm NZD RBNZ Gov Wheeler Speaks
7:30pm AUD Trade Balance
Wednesday, February 3
4:30am GBP Services PMI
8:15am USD ADP Non-Farm Employment Change
10:00am USD ISM Non-Manufacturing PMI
10:30am USD Crude Oil Inventories
Thursday, February 4
3:00am EUR ECB President Draghi Speaks
7:00am GBP BOE Inflation Report
7:00am GBP MPC Official Bank Rate Votes
7:00am GBP Monetary Policy Summary
7:00am GBP Official Bank Rate

7:45am GBP BOE Gov Carney Speaks
8:30am USD Unemployment Claims
7:30pm AUD RBA Monetary Policy Statement
7:30pm AUD Retail Sales m/m
Friday, February 5
8:30am CAD Employment Change
8:30am CAD Trade Balance
8:30am CAD Unemployment RateUSD
8:30am USD Non-Farm Employment Change
8:30am USD Trade Balance
8:30am USD Unemployment Rate

*All times EST
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza