Bank of Japan fights back

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After the lowering of interest rates from the Swiss National Bank (SNB) on Wednesday, it was the turn of Japan to try and curb the strength of its currency.  In the wake of today’s latest BOJ meeting, monetary policy was further expanded via an increase in existing asset purchase programs and lending facilities.  Furthermore, in conjunction with the Ministry of Finance, the Bank of Japan sold yen in the market, pushing USD/JPY from 77.00 to above the 79.00 area. 

Talk is of around JPY 1trln of yen sales, although there is no confirmation of this.  Naturally, the key question is how effective both the BoJ and SNB will be in terms of arresting the appreciation of their currencies.  In reality, they are fighting some fairly strong forces that are likely to be in place for months, if not years.  Furthermore, the fact that the SNB has not come out selling francs is pertinent.  After the intervention of 2009-10 which failed to stop the franc’s increase, it (given its balance sheet) is less inclined to jump in again.  Both Japan and Switzerland are unlikely to achieve long-term success with this week’s policy action, Switzerland especially so.

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Commentary

ECB stuck in a corner.  Since the ECB (mistakenly) increased rates last month, events have almost unanimously gone against it, both in the eurozone economy, the global economy, the sovereign crisis and the conditions in eurozone money markets.  At the time of the July tightening it seemed that the ECB was holding onto a series of bold beliefs, particularly that the recent softer run of data was a temporary phenomenon and that the sovereign crisis was going to be contained. Both beliefs have proved to be incorrect and, whilst hindsight is a wonderful thing, the risks were all too apparent back in July.  Whether Trichet acknowledges this at today’s post-meeting press conference is another thing, but the conditions we are seeing in the eurozone money markets suggest that, without some action from the ECB today in terms of at least acknowledging what is going on, there will be severe disappointment all round.

US data provides some relief.  The fall from 53.3 to 52.7 in the July non-manufacturing ISM data was only slightly softer vs. expectations, but was met with some relief given the disappointing data that has characterised the week so far. Prices paid were softer, although the new-orders balance fell to levels last seen nearly two years ago. Furthermore, the employment balance also headed lower after two consecutive months of improvement. The data is still indicative of a more sustained ‘soft patch’ in the US economy.

Bank of England seen steady once again.  Given the ongoing divisions on the Monetary Policy Committee, there are no strong expectations of a move from the Bank of England today.  Still, given the data we’ve seen over the past month, together with the fact that the economy has grown only 0.2% over the past 9 months, it will be interesting to see if there are still committee members voting for an increase at this meeting (minutes release in two weeks time).  Some shift back to a steady stance from the two currently calling for higher rates would not be that much of a surprise.

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