Japan adopts negative interest rates

NBK MONEY MARKETS REPORT

Another bomb dropped on investors this Friday, with the Bank of Japan adopting a negative interest-rate strategy in the face of a weakening economy and a global slowdown. The move to penalize banks’ reserves will be added to the BOJ’s asset-purchase program already in place. With a 5 to 4 vote, Kuroda introduced a negative rate of 0.1 percent on certain excess holdings of cash.

The decision came after year on year inflation came at -0.3 percent where expectations were for a flat number. Industrial production and household spending also weakened, which prompted the BoJ to intervene on Friday.

Last week, BoJ governor Kuroda said there were no signs that the global economic slowdown had damaged Japan corporates plans; however the move clearly proves policy makers have acted in an attempt to avoid Japan entering in a major slowdown.

In summary, the BoJ adopted the same strategy as the ECB in an attempt to tackle inflation and the Yen reacted instantaneously tumbling after the announcement. The negative rate interest rates policy takes effect on February 16 and will operate similar to programs in Europe.

In addition to the move, the BoJ delayed its target date of reaching its 2 percent inflation goal by six months, aiming for the first half of fiscal 2017, while also downgrading current year forecasts. The Yen initially plummeted over 2 percent, rallied back, and closed the extremely volatile Friday at 121.14 against the dollar. Japanese equity markets also reacted violently to the move with the Nikkei up over +3 percent initially, then tumbled to losses of -1 percent, but bounced back to end the week adding 2.8 percent.

Clearly, the measures taken by the BoJ are aimed at cheapening the currency. Similarly to the Euro, the negative rates should encourage investors to choose the Yen as a funding currency. With its latest measures, the Bank of Japan entered again into a currency war on the back of China trying to devalue its Renminbi in the ongoing persistent commodity price disinflation. The BoJ will allow Japan to borrow more growth from its trading partners and limit the severity of the imported disinflation. The BoJ’s move should ultimately result in more currency wars and continuing slowdown in global trade and growth.

In this whole chaos, the Euro traded in a narrow range the whole week between 1.07090 and the 1.0960 level. As mentioned earlier, the Yen was the major loser closing the week dropping 4 percent against the dollar. Growth currencies behaved well this week helped by a dovish Fed and the BoJ trying to refuel a risk taking environment. Canadian Dollar closed the week up 2 percent against the dollar while the Australian Dollar closed 1.7 percent

For now, we remain in a binary scenario. Either Chinese worries abate with oil stabilizes at around these levels as we had witnessed in AugustSeptember 2015, or China continues to devalue its currency, the US slows down, and the volatility environment we have witnessed in the beginning of the year returns back.

On the commodities side, oil once again dominated the news this week as headlines which ended up just being rumors suggested that Russia and OPEC were looking at setting up talks to discuss production cuts. Crude peaked at $34.82 following the news before settling down to close the week at $33.62. Brent followed suit at $35.99, however ended the week at $35.80

Bleak US data

This week, very soft durable and capital goods order numbers in the US raised the prospects of further downside risk to activity levels in Q1 2016.

Headline durable goods orders for December came at -5.1 percent much below expectations for a more modest -0.7 percent drop. The data excluding transportation was also weak at -1.2 percent against expectations of -0.1 percent. Core capital goods orders fell -4.3 percent against expectations of - 0.2 percent, which was the largest monthly decline since October 2014.

The data showed a significant downward momentum in private domestic demand. In addition, the ongoing weakness in oil prices has put a lot of pressure on corporate activities in the US implying a significant pullback in capital spending in 2016.

Another weak data was the Dallas Fed January manufacturing activity index coming at -34.6, its lowest level since April 2009 against consensus of -14.0. One respondent said that “We expect the continued depression in the oil and gas industry to negatively impact our customer base and result in significant demand reduction.

On the employment front, initial jobless claims decline 16k last week to 278k which was slightly better than the 281k expected. In addition, the latest housing market data was less supportive with pending home sales only up +0.1 percent against expectation of 0.9 percent increase last month. The only positive other release was the Kansas City Fed manufacturing activity index which was unchanged at -9 with expectations of -10

Kuwait

Kuwaiti dinar at 0.30310 The USDKWD opened at 0.30310 yesterday morning.