The big news was the shock easing by the BoJ on Friday afternoon.
The BoJ introduced a tiered interest rate structure for bank reserves. A new minus 10bp rate will be applied to (mainly) new reserves created from mid-February. No change to the quantitative easing programme was announced.
No one had predicted an interest rate cut, mainly because BoJ Governor Kuroda had recently said such a move was not being considered.
The announcement followed data earlier in the day showing larger-than-expected declines in industrial production and household spending, and soft CPI data.
With the negative interest rate only applied to a small amount of bank reserves, the policy was really designed to weaken the Yen, fuelling the global “currency war”, and that was the result, with the Yen falling by 1.9% against the USD, taking USD/JPY up to 121.14 by the end of NY trading. The shock move caught the market off-guard, with speculative net long positions in Yen at a 4-year high, with many believing that the period of Yen weakness was over. The move to negative rates in Japan, with a promise to go further into negative territory if required, is likely to keep the Yen under pressure over coming months.
The shock move caused all sorts of odd currency movements in the ensuing hours, including a lift in NZD/USD to a high of 0.6543, before some retracement occurred. The other key news event was US Q4 GDP data coming in at an annual rate of 0.7%. While this was 0.1% below market expectations, the composition of growth was better, being driven by increased consumer spending and a reduction in inventories. Some had feared a weaker figure and one driven by inventories. This boosted the USD across the board and helped drive equity markets higher. The S&P500 was up 2.5%, and the Euro Stoxx 600 was up 2.2%. Japan’s Nikkei index ended up 2.8% after a wild swing in equity prices that at one stage saw prices drop almost 5% in 45 minutes.
Helping boost market sentiment was a further recovery in oil prices, with Brent crude ending the session up 3.4% at just under $36 and WTI crude up 1.2% to $33.60. There was a general lift in most other commodity prices as well, as investors cheered further central bank easing.
In the wash-up from all the news, the NZD ended the day flat at 0.6484, although NZD/JPY was up 2% to 78.54. The AUD was also flat, at 0.7084, after reaching a high of 0.7141. NZD/AUD was flat at 0.9151. Both EUR and GBP weakened against the USD, following the US GDP data, falling 1% and 0.8% respectively to 1.0831 and 1.4244.
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