In a somewhat ironic twist, January of 2016 ends on a very positive note on the markets, in part due to Bank of Japan which introduced negative interest rates for the first time in its history. The yen is down and risk assets are up, yet investors should realize one thing: if central banks reach last resort methods, it cannot be all rosy.
It’s not about the scale of what the BoJ did – introduced -0,1% rate will apply only to new balances so it might not have such a dramatic effect on monetary conditions in Japan after all, especially in comparison to the QE program. However, it was more about the meaning: the Bank made it clear that it did not want to be a loser in the currency wars and signalled that it sought a weak yen as one of the tools of achieving inflation goal of 2%. So on one hand the risk assets are up today – firstly because some JPY long trades need to be unwound, secondly because financing will be even cheaper – the BoJ had an impact not only on the JGBs (where 10yy is down from 23 to 10bps) but on the curves across the globe – German 10yy are down by 8bps today and US by 5bps, even amid favourable risk environment. Then again, it means banks have little faith in organic growth and what is more these moves make China even more likely to devaluate the CNY sooner rather than later – something that had exactly the opposite impact on risky assets (and currencies) than today’s decision made by the BoJ.
The data that we will get in Asia on Monday will show us just how likely to move the currency Beijing will be. The PMIs started the avalanche of fear in January but this time it’s not so sure – the Chinese authorities have applied a lot of stimulus and may fool the market for some time after all. Either way it’s probably going to be China that will have a decisive impact on the markets in February, but just because it has been until now.
One thing that needs to be highlighted is the huge improvement in the Chicago PMI index today – the release clearly stood out among other reports offering hopes that the US economy could accelerate from that sluggish Q4 growth (of just 0,7%) despite headwinds.
Last but not least, it was a solid week from oil – it was actually the first week this year when the WTI did not make a fresh multi-year low! Rig counts are down but investors need to see at least some stabilization in the US inventories if this rally is about to last.
Next week we start with China and finish with the NFP report. If the Chinese data shows at least stabilization then probably the NFP will count for the USD.