Negative Rate Loans? USD/JPY Blows Through 110

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Market Drivers April 22, 2016

BOJ Considers negative rate loans
EZ Flash PMIs miss
Nikkei 1.20% Dax -0.37%
Oil $43/bbl
Gold $1250/oz.

Europe and Asia:
EZ Composite PMI 53 vs. 53.3
GBP UK PSNB 4.8B vs. 6.0B

North America:
CAD CPI 8:30
CAD Retail Sales 8:30

USD/JPY blew through the psychologically key 110 level in late Asian trade today after Bloomberg reported that BOJ is mulling a program to provide negative rate loans to the banks.

The BOJ has two lending facilities, one that offers banks zero-interest funding for loans to companies in high-growth industries and one that provides zero-interest long-term funds to banks that increase lending more generally.

Both of these programs would be candidates for the negative rate loans in which the BOJ would pay banks to borrow funds and lend them to the broader economy. These lending facilities would be established in addition to the current QE program which already commits the BOJ to buying 80 trillion yen per year in government bonds and 3.3 trillion yen of exchange-traded funds.

The possible move by BOJ suggests that the central bank is clearly becoming concerned about the USD/JPY exchange rate and may be trying to do anything it can to counteract Fed’s dovish stance which helped drive the pair lower by more than 1000 pips over the past several months. Whether the BOJ actually goes through with this plan may depend on Fed’s statement next week. If US policymakers continue to refrain from normalizing rates indicating that policy may remain on hold until the end of the year, then Mr. Kuroda could act at the next BOJ meeting on April 28th to counteract the dovish impact of the Fed move. The net result is that global long term yields could decline further as G-3 central banks pursue non conventional policies.

USD/JPY rose to a high of 110.75 in the aftermath of the report but has since come off the highs in morning European dealing. In Europe the latest flash PMI data came in a little soft with composite reading printing at 53 versus 53.3 eyed. That is still comfortably above the 50 boom/bust level but it cause a bit of risk off flows sending DAX down by nearly half a percent.

With no US data in North American session equity flows will likely drive trade for the rest of the day and if stocks begin to selloff into the weekend USD/JPY could test 110 level once again, but this time as support.

Boris Schlossberg
Managing Director

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