While Bank of Japan officials see no grounds for Donald Trump’s accusation of currency devaluation, they still worry that the bank’s unique measure to control long-term rates could become the next target as the president continues his rhetorical battles.
“I have no idea what he is saying,” said one baffled BOJ official after learning about the criticism Trump leveled against the central bank.
Bond investors seem similarly perturbed. Yields on 10-year Japanese government bonds temporarily rose 0.025 percentage point Thursday, hitting 0.115% — the highest since the BOJ announcement of negative interest rates Jan. 29, 2016. The climb also reflects market anxiety over whether the central bank will continue buying up JGBs at the current pace.
BOJ Gov. Haruhiko Kuroda refuted Trump’s accusation in the Diet on Wednesday, saying Japan’s monetary policy is designed to defeat persistent deflation and not to keep the yen weak. “We discuss monetary policy every time Group of 20 finance ministers and central bankers meet,” he said. “It is understood among other central banks that [Japan] is pursuing monetary easing for price stability.”
In fact, U.S. monetary policy is chiefly responsible for the yen’s depreciation against the dollar. The Federal Reserve in 2015 switched to a tightening mode after keeping interest rates near zero for years, judging quantitative easing to have worked its expansionary magic on the economy. The gap between American and Japanese rates is now the widest it has been in around seven years, encouraging heavier buying of the dollar — the higher-yielding currency — than the yen.
Don’t anyone accuse Brazil’s central bank of not being bold.
In a unanimous decision, the bank cut its policy interest rate by 75 basis points on Wednesday, exceeding the consensus call for a 50bps cut and sharply picking up the pace on an easing cycle it began with two back-to-back cuts of 25bps each in October and November
In a statement, the bank said economic activity had fallen below expectations and that a recovery would take longer than previously anticipated.
It also noted data released earlier in the day showing inflation falling faster than expected to 6.3 per cent in the year to December 31 – the first time in two years it has been within the central bank’s target range of 4.5 per cent plus or minus 2 percentage points. Market economists expect it to end 2017 at 4.81 per cent, according to the central bank’s latest weekly survey.
The size of the cut will be welcomed by many, given the economy’s stubborn refusal to return to growth. The rebound expected by many when congress ditched president Dilma Rousseff last year has failed to happen. GDP contracted by 8 per cent over the past two years under Rousseff’s watch; her pro-growth, market-friendly successor, Michel Temer, was expected to turn things round quickly.
Stocks ended mixed Thursday as retailers dominated the news with Macy’s and Kohl’s both plunging following weak holiday-season reports that led the chains to cut their profit forecasts.
Still, the Nasdaq composite’s modest gain of 11 points, or 0.2%, was enough to notch a new all-time high. Settling at at 5487.94, it topped the old record by half a point.
The Dow Jones industrial average finished down 43 points, a 0.2% decline to 19,899.29. Losing 0.1% was the S&P 500, which settled at 2269 even.
nvestors were also focusing on upcoming U.S. jobs data following the publication of the minutes to the Federal Reserve’s last board meeting.
Private U.S. companies added 153,000 jobs in December, according to payroll processor ADP. That total was a bit lower than analysts expected and slightly slower than the pace of hiring for the rest of 2016. The government will issue its own hiring report on Friday.
With Trump’s border tax adjustment looking increasingly likely, the stock market – as JPM has warned in recent days – is starting to fade the relentless Trumponomic, hope-driven rally since election day instead focusing on the details inside the president-elect’s proposed plans. And, as explained earlier in the week, if the border tax proposal is implemented, economists at Deutsche Bank estimate the tax could send inflation far above the Federal Reserve’s 2% target and drive a 15% surge in the dollar.
While this would be bad for stocks, as a 5% increase in the dollar translates into about a 3% negative earnings revision for the S&P 500 all else equal, a surge in inflation would also wreak havoc on bond prices, and send interest rates surging, at least initially, before they subsquently plunge as a result of a rapidly tightening, deep “behind the curve” Fed unleashes a curve inversion and recessionary stagflation becomes the bogeyman du jour.
The jolly chaps and chapesses at Danske Bank have the euro all mapped out for next year
Danske see EURUSD bottoming at 1.0200 in their 1 month forecast.
“In the short term, on the one hand there will be downward pressure on the US monetary base from the higher federal funds target and from the impact of new banking regulation with US banks set to be required to have an LCR of 100% by 1 January 2017. On the other hand, deposits on the US treasury account may fall at the beginning of next year after a resuspension of the debt ceiling, which will tend to increase the monetary base. Overall, this is likely to be marginally positive for USD and weigh on USD FX forward points vis- à-vis EUR and the Scandinavian currencies on top of the impact of the repricing of the path of Federal Reserve rate hikes, e.g. keeping the 3M EUR/USD basis spread around the present 70-80bp, and thus maintaining a significant negative carry on short USD positions.”
In 12m they see the euro at 1.1200.
Mainland China has lost its status as the largest overseas holder of the US debt to Japan as the recent decline in the renminbi’s FX rate and the strengthening yen have affected the value of the two nations’ respective Treasury note portfolios.
The yen’s status as safe haven asset as fiscal stimulus effort have attracted investment capital to Japan, resulting in stronger yen, whilst China, struggling with low factory-gate inflation and weak international demand for manufactured goods, had to decrease its holdings of the US debt. Japan, now the biggest foreign holder of US Treasury debt, held $1.13 trln worth of US bonds in October, whilst China’s holdings shrank to their six-year lowest at $1.12 trln, according to the data from the US Department of the Treasury. Beijing has been selling US bonds in order to alleviate the downward pressure on the renminbi’s FX rate stemming from lingering economic turmoil. Mainland China uses the dollars obtained from selling the Treasuries to buyback the renminbi, currently at its 8-year lowest in offshore trading.
Japan, however, had been selling Treasuries in early autumn, too, due to the uncertainty surrounding the US presidential election. The subsequent developments in the form of the election of Donald Trump and the plunge in Treasury bond value accompanied by the rising benchmark 10-year yield have proven selling Treasuries the right move, but the yen’s ongoing appreciation has made Japan the largest international US bond holder.
Wednesday’s U.S. rate hike has caused ripples through global markets, as investors began to contemplate the impact of American monetary tightening and beefed-up fiscal spending under a President Donald Trump.
Many traders at a stock brokerage here described comments by Federal Reserve Chair Janet Yellen Wednesday as more hawkish than expected.
A 25-basis-point increase in the federal funds rate was announced at 2 p.m., following a two-day meeting of the Federal Open Market Committee. The first hike in a year, which lifted the benchmark rate to a range of 0.5% and 0.75%, was largely expected. But Yellen also revealed that the Fed was now looking at raising the rate three times in 2017, instead of the two hikes that had been indicated before.
Yellen also cautioned against guessing President-elect Donald Trump’s intentions regarding fiscal spending. “We’re operating under a cloud of uncertainty at the moment and we have time to wait and see what changes occur and factor those into our decision-making as we gain greater clarity.”
Fed watchers took this as an indication that the pace of rate hikes could hasten to more than the three estimated for 2017 as Trump’s policies are implemented.
Federal Reserve interest rate decision December 14, 2016 highlights
- Fed hikes to range of 0.50%-0.75%
- All 103 economists surveyed by Bloomberg forecasted a hike
Highlights of the statement:
- Repeats gradual policy path plan
- Policy supporting ‘some further strengthening’ on goals
- Votes were unanimous
- Stance of monetary policy remains accommodative
- Officials see three 2017 hikes versus two in Sept dots
The sell-off in government bonds continues, with US Treasuries leading Asian counterparts lower on Monday and ahead of the Federal Reserve’s decision on interest rates later this week.
The yield (which moves inversely to price) on the benchmark 10-year US Treasury rose as much as 2.74 basis points in morning trade today to 2.4949 per cent.
That level is not quite enough to surpass the intraday high of 2.4985 per cent hit on June 11, 2015, but it puts it on track to be the highest closing level since September 2014, which also happens to be the most recent month when yields closed above 2.5 per cent.
There’s a similar pattern playing out with Japanese and Australian government bonds today. The 10-year JGB yield is up 0.2 basis points at 0.063 per cent, the highest level since February this year. The yield on the 10-year George Lazenby*, up 4.3 basis points at 2.858 per cent, is at its highest level since December 2, which in turn is the highest level of 2016.
Yields on government bonds have galloped higher since Donald Trump won the US election, with markets taking the view his economic policies would spur inflation. That has blunted demand for haven investments, such as Treasuries, the Japanese yen and gold.
More broadly, the inflation outlook in the US has been picking up this year such that markets think the Federal Reserve will be comfortable with lifting interest rates by 25 basis points at their policy meeting on Wednesday, the first increase in a year.