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Publication date: 4 April 2013
Author: Nawaz Ali, Western Union Business Solutions
Japanese yen plunges against US dollar overnight
The Japanese yen was destructively taken apart by traders in last night’s Asian session after Haruhiko Kuroda came to the table in his first monetary policy meeting as the new governor with the unparalleled monetary stimulus package that markets have been anticipating for some months. The Japanese currency plunged against the US dollar overnight after the Bank of Japan launched into its mandate of ending years of deflation and meeting a 2% inflation goal with an extraordinary new approach to monetary stimulus.
Although analysts will continue to assess the BoJ’s new monetary easing model, the initial market reaction has seen Japanese stocks and risky bets surge at the expense of the devalued and defensive Japanese currency. The yen’s retreat has given the US dollar a broad lift against the major currencies, allowing the greenback to brush aside yesterday’s disappointing US economic data.
The US dollar’s rise has also put additional pressure on sterling and the euro ahead of today’s monetary policy decisions from both the Bank of England and European Central Bank. The pound may endure another difficult period if this morning’s UK services data misses expectations. Meanwhile, volatility for the euro is also likely with President Mario Draghi probable to give markets plenty of policy and currency guidance in his press conference that follows the ECB’s interest rate decision.
The pound has made a weak start this morning in front of today’s services data and Bank of England monetary policy decision, reflecting concerns that fragile business activity may strengthen the case for more central bank stimulus. The BoE is not expected to unveil any changes to its monetary policy structure following today’s meeting. However, there is a chance that worrying economic data will stimulate a more dovish approach amongst the Monetary Policy Committee with three of its nine members already calling for an additional £25bn of quantitative easing. Growth in Britain’s dominant services industry is forecast to have slowed slightly from 51.8 to 51.5 according to today’s PMI survey. Should the data uncover a sharper slowdown, markets may restore selling of the British currency on speculation the BoE will soon launch another round of money-printing.
The US dollar has been given a broad boost having advanced by almost 3% against the Japanese yen overnight following the Bank of Japan’s decision to launch an extraordinary new approach to monetary stimulus. The greenback could add to its latest rally in the session ahead if traders take a dim view of services data from the UK today followed by central bank policy decisions from both the Bank of England and European Central Bank. However, the US currency’s upside may be limited ahead of Friday’s US non-farm payrolls and unemployment data, figures that are now central to the Federal Reserve’s open-ended stimulus programme. The US dollar’s overnight surge also masks its poor performance in yesterday’s North American session which came after data showed the US services sector slowed in March at a quicker pace than investors had expected. The country’s ISM non-manufacturing index fell from 56.0 to 54.4 last month versus forecasts of 55.8.
Markets will play very close attention to Mario Draghi’s latest press conference today, with the European Central Bank president likely to talk extensively about the risks of renewed turbulence across European financial markets and how this may impact the ECB’s economic growth projections. The euro is already stuck near the bottom end of its recent trading ranges but could face an even more difficult short-term outlook if Draghi indicates the ECB may have to activate some form of stimulus amid signs that recession in euro area economy has worsened. The single currency has endured a high level of volatility in recent weeks as Cyprus struggled to agree terms on a bailout with its international lenders; a deal that become stuck on the issue of swiping bank deposits to make-up a short-fall of about €6bn. Draghi will be speaking after the ECB announces its monetary policy decision for April today in which analysts expect to see no changes to the central bank’s main interest rate.
The Japanese yen crashed overnight, suffering heavy losses against all of its major trading partners after new Bank of Japan governor, Haruhiko Kuroda, unleashed a new phase of monetary easing. The yen had gained in recent session leading up to Kuroda’s first meeting in charge on assumptions that the new governor will not be able to match market expectations of bold monetary easing that have been built up over the past few months. However, Koruda last night delivered what some analysts felt was a heavier-than-anticipated hand on a new bond buying strategy. The Japanese central bank announced a switch from targeting interest rates to focusing more on the central bank’s monetary base; a base that will be doubled over the next two years and will include more risky and longer-term asset purchases as Kuroda aims to defeat Japan’s chronic deflation problem in record time. The BoJ also announced that it will bring forward its plan to start an open-ended stimulus programme, similar to what the US Federal Reserve has deployed, which was due to begin early next year. The markets initial reaction towards last night’s monetary policy decision suggests investors have no doubt that Kuroda will take an unparalleled approach to meeting the government’s 2% inflation target which is a frightening prospect for the Japanese currency