The yen fell on early this morning after the Bank of Japan unexpectedly cut interest rates and launched a fund to buy assets, they have effectively lowered their benchmark lending rate to 0% now in a move to both oil the wheels of commerce and lower the value of their currency.
The Japanese economy has been stagnant for a while now and consumers have been more than lack-luster due to very low inflation levels and the commonly held belief that if they hold of buying that new car or television then the price will drop. The Japanese authorities want to encourage bank lending and they have effectively said to the banks, borrow as much as you want, we won’t charge you anything, lend it out and get the high street moving again.
“The BOJ’s move will cap yen appreciation, but they will need to come in and intervene if dollar/yen is to go beyond 85/86 or we’d need to see a trough in U.S. rates and yields which is the main driver of dollar/yen downside,” said Societe Generale currency strategist Kit Juckes.
BOJ can further discourage holdings of yen-denominated balances by cutting the rate paid on required reserves to zero and to charge a negative penalty rate on any holdings of excess reserves effectively lowering to less than zero percent where banks will be charged for holding the Yen.
Exports in Japan have also suffered because of the high value of the Yen, the Bank of Japan have tried to intervene but their efforts have been short lived, by lowering the interest rate they are hoping to discourage banks from buying Yen which could have a longer term impact on currency values.
The Australian dollar fell sharply after the Reserve Bank of Australia surprised by not raising rates this morning. Markets expected a rise of 0.25% due to high inflation figures and a strong economic base. This might only be a delay and traders will now expect the move to happen at next months meeting. Any Australian dollar weakness is likely to be a knee jerk reaction with the longer term trend reasserting itself soon.
Uk services PMI supported the pound this morning when the reading came out higher than expected, the release showed that non-manufacturing growth showed its first positive reading for 4 months at 52.8 versus an expected 51.3. This is certainly a clue that the BOW might not add further Quantitative easing measures, they watch this area of the economy very closely.
