The Bank of Japan, as widely expected, abandoned its one per cent inflation target and replaced it with two per cent. Japanese policymakers announced their most determined effort to end years of economic stagnation on Tuesday, by declaring they would switch to a Federal Reserve-like open-ended asset purchases programme and also doubled its inflation “goal”.
Sterling is under extreme pressure since the start of the year, and is the second worst performer among majors so far- Emman Xuereb
Under the new plan, the Central Bank said that it will buy 13 trillion yen ($144.77 billion), each month starting January 2014, without setting a deadline for completing the purchases.
The decision to undertake more aggressive monetary easing came as no surprise following weeks of relentless pressure by new Prime Minister Shinzo Abe, who has called for bolder steps to beat deflation and lift the ailing economy out of its slump. However, the Central Bank surprised markets by announcing that the new scheme will only come into effect next year and disappointed investors who were hoping for more aggressive stimulus now.
Government officials from Tokyo welcomed the decision by the BOJ to switch to an open-ended commitment to buying assets and double its inflation target. Finance Minister Taro Aso spoke of high appreciation by the Government, while Prime Minister Abe hailed the decision, saying it was “epoch-making in a sense of bold review of monetary policy”. Following its two-day meeting the BOJ also announced that it would keep rates at 0.10 per cent, as expected, but many analysts now feel that the next step for policymakers would be to scrap the 0.10 per cent floor for short-term interest rates.
The dollar rose close to a two-and-a-half-year high hit at the start of the week against the yen following the announcement, but the Nipponese currency soon rallied across the board as forex investors rushed to book their profits after the BOJ’s decision. USD/JPY jumped to 90.08, shy of its peak of 90.23 reached on Monday, but fell almost 1.4 per cent to 88.37 by the time of writing, as stop-loss orders triggered accelerated its decline. EUR/JPY also gave up initial gains, dropping from a session high by 120.16 to a low of 117.33. The single currency pared its losses later in the day as it was lifted by a much stronger than expected ZEW economic sentiment figures from Germany and the euro area.
The bounce by the Japanese yen was not expected to be long-lived however, and the currency is expected to come under renewed pressure in the medium-term especially in the light of a forthcoming change at the helm of the BOJ, with Governor Masaaki Shirakawa’s term coming to an end this coming April.
Demand for the common currency was bolstered on Tuesday following a much better than expected improvement in economic sentiment. The German ZEW economic sentiment index surprised positively for January recording an impressive 31.5 versus a consensus of 12, decisively better than the previous reading from December of 6.9. The eurozone economic sentiment reading also fared much better than its previous one, rising to 31.2 from 7.6.
The single currency was lifted following the unexpectedly high ZEW readings. EUR/USD rallied to above 1.3350, recovering from a session low of 1.3267 and looked set to halt two consecutive days of decline. On Tuesday, EUR/USD initially rose to 1.3371 and was expected to test an 11-month high hit earlier this month by 1.3404. The pair fell sharply at the start of the European session on Tuesday, following rumours that Bundesbank president Jens Weidmann will step down, and on talk that the German regulation authority Bafin asked large banks to split their investment banking operations. The pair is expected to remain supported in the near-term, as concerns over the debt crisis abate. The next key objective for the pair is now represented by its 200-week moving average by 1.3525.
The British pound is under extreme pressure since the start of the year, and is the second worst performer among majors so far in 2013. Cable has been weighed by a series of downbeat economic data, while growth forecasts for the last quarter of 2012 are pointing at yet another recession. Sterling is down almost 3.50 per cent against the single currency and around 2.40 per cent versus the dollar.
EUR/GBP hit its highest level since February 29 of last year on Tuesday by 0.8441, and looked to extend its rise further as a result of the sterling’s negative outlook for the near-term. GBP/USD has declined sharply over the past couple of weeks, falling to a four and a half-month low by 1.5806 earlier in the week, from a 16-month peak of 1.6382 reached on January 2.
Upcoming FX key events:
Today: EZ Flash PMI and US Flash manufacturing PMI.
Tomorrow: UK GDP Advance, Canadian CPI and US New home sales.
Technical key points:
EUR/USD is bullish, target 1.3500, key reversal point 1.2870.
EUR/GBP is bullish target 0.8500, key reversal point 0.80.
USD/JPY is bullish, target 92.50, key reversal point 82.00.
GBP/USD is neutral.
USD/CHF is neutral.
AUD/USD is neutral.
NZD/USD is neutral.
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Emman Xuereb is a trader at RTFX Ltd.