Market Drivers Jan 29, 2016

BOJ goes negative rates
EZ Flash CPI slightly better
Nikkei 2.80% Eurostoxx 1.43%
Oil $33/bbl
Gold $1112/oz

Europe and Asia:
JPY BOJ goes to -10bps
EUR EZ CPI 1% vs. 0.9&

North America:
USD GDP 08:30


USD Chicago PMI 09:45

The Bank of Japan surprised currency markets today by adopting negative rates, causing USD/JPY to soar in late Asian session dealing. USD/JPY spiked to a high of 121.40 then quickly reversed and finally settled just below that level in high volatile trading after BOJ announced that it would charge 10 basis points on any cash left on deposit with the bank.

The move comes amidst deteriorating fundamentals for the Japanese economy as both the industrial and the consumer sector have slumped in the past month due to slowdown in demand from China and revival of deflationary pressures from collapsing energy prices.

The BOJ pared its estimate of inflation to just 0.8% versus 1.4% prior and pushed back its forecast for 2% inflation target all the way to mid 2017. The central bank noted that negative rates will be adopted in tandem with QQE, but it kept its targets for QE at 80 trillion yen deciding not to expand monetary stimulus for now.

The Japanese central bank now joins SNB and Risksbank in moving towards negative interest rates – a very unorthodox monetary experiment with little historical record for policymakers to rely on. The move highlights the growing concern by G-10 monetary authorities over the rapid slowdown in economic activity and the return of deflationary pressures due to massive decline in demand for commodities.

The BOJ which has been struggling with deflationary pressures for a better part of three decades has never moved to negative rates until today. The policy action was closely contested with members splitting votes to 5-4. It’s too early to tell whether this novel approach will arrest the deflationary forces in the Japanese economy, but it is clear that BOJ officials felt that they had no other policy options at this time and the move certainly provided support for USD/JPY which was drifting dangerously close to 115.00 level which would have only exacerbated the problems for the export driven economy.

The move also put enormous pressure on the Fed to stay still for the time being. With ECB considering negative rates at its next meeting we could have a situation which two of the G-3 central banks are charging for cash. Under those conditions the Fed would be hard pressed to raise rates further and accentuate the imbalances in the system.

In North America today the market will get a look at the 4th quarter GDP data and if the numbers are weaker than anticipated then the pressure on Fed to remain stationary will only grow.

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