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JPY tumbles amid BoJ’s announcement, Draghi tries to convince the markets

- German treasury yields movements suggest markets bored with verbal intervention and now want to see some real effective movement in interest rates

- In our view German concerns about ECB monetary policy are definitely legitimate as overall efficiency of the current monetary policy should be brought to the table.

- In Asia USD/JPY may further strengthen after the BoJ announced it was discussing negative-rate loans for financial institutions together with another rate cut, determined to weaken the yen further

- USD/JPY is moving towards 110.67

- AUD/USD is lacking the strength to break the 0.7849 and there is every chance that the Aussie will reverse momentum as soon as the commodity rally ends

 

In Asia USD/JPY jumped more than 1% to 110.50 after the BoJ announced it was discussing negative-rate loans for financial institutions together with another rate cut. Separately, Japan’s manufacturing PMI printed at 48 in April, missing an estimate of 49.5 and was below the previous read of 49.1. The Japanese currency rose to a two-week high against the US dollar as investors learn of the BoJ’s plans to further weaken the yen. For now, USD/JPY is moving towards the previous support at 110.67, now resistance, while on the downside a support can be found at 108.87 (low from April 20th). Similarly, EUR/JPY surged 1.05% in Tokyo and hit 124.90. The pair almost completely erased yesterday’s losses following the ECB’s decision to keep rates unchanged.

As expected, the European Central Bank left its main policy rates unchanged and gave further details regarding the size increase of its bond-buying program. As already announced, the program will be extended to non-bank companies, while the maturities of the bonds will be between 6 months and 30 years. The institution could also buy these bonds on either the primary or the secondary market. Finally, the European institution could buy up as much as 70% of a single issue. All in all, there was nothing really new with most of this already priced in. Initially, German treasury yields moved lower but quickly bounced back to their original level, suggesting that the market is bored with verbal intervention and now wants to see some real effective movement on interest rates. As we mentioned in yesterday’s Market Snapshot, EUR/USD traded sideways ahead of the ECB meeting before moving sharply during the press conference. However, in the end the pair returned to its initial level but not without first rising to 1.14 in reaction to Draghi’s comments.

Yann Quelenn, market analyst: “The ECB meeting yesterday was, as expected, a clear non-event, with no monetary policy change being announced. Most of the press conference after the rate decision was verbal intervention to maintain confidence in ECB policy.

ECB President Mario Draghi also confronted recent criticism expressed by German policymakers saying that this come down to a delay in the achievement of the monetary policy objectives and “therefore the need for more expansion”. In our view, German concerns are definitely legitimate and the overall efficiency of the current monetary policy should indeed be brought to the table.

Draghi also mentioned that the path to the inflation target will take more time. This path is clearly very complex and the former Goldman Sachs banker added that inflation may in fact enter into negative territory before coming back to positive. Does this mean there will be no positive results achieved this year? Draghi is definitely trying to maintain confidence in the ECB monetary policy despite likely adverse results in the short/medium term.

Mario Draghi spent the rest of the press conference walking a line between maintaining confidence in the Central Bank and adding downside pressures to the single currency. Too much concerning brexit rhetoric for example would have pushed the EUR further downward but would have also affected the European institution’s credibility and created useless volatility. He was therefore too reluctant to go too much further into detail about monetary policy expansion. Helicopter Money is at the moment a viable scenario.

Scrutiny is growing as current ECB actions seem unable to pave the way to higher growth and inflation. For the moment the institution’s credibility is still solid…but for how much longer will this last?” ---

As usual, the commodity bloc reacted positively to a consolidation of crude oil prices. The Australian dollar edged up 0.25% in Sydney as the international gauge, the Brent crude, stabilised around $43.70 a barrel. However, AUD/USD is lacking the strength to break the 0.7849 resistance as most of the previous week’s appreciation is due to the commodity rally and not to any positive signal from the Aussie economy. There is therefore every chance that the Aussie will reverse momentum as soon as the commodity rally ends.

On the equity market, Asian indices are broadly trading in negative territory with the exception of Japanese shares, which are boosted by the BoJ announcement. The Nikkei and the Topix index were up 1.20 and 0.99% respectively. In mainland China, the CSI 300 was up 0.35%, boosted by further appreciation of tech companies. Offshore, Hong Kong’s hang Sang was up 0.77%, while in Taiwan the Taiex fell 0.38%. In Europe, futures are pointing towards a lower open as traders appear reluctant to push equities higher ahead of the weekend.

Today traders will be watching Markit PMIs from France, Germany, the Eurozone and the US; industrial orders and retail sales from Italy; retail sales and CPI from Canada.

Friday, 22 Apr, 2016 / 8:26

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Source : http://swissquote-fx.com/en/research-and-analysis/

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