The most important central banks among the developed economies are set to announce interest rate and monetary policy decisions in the forty-eight hours after the Fed speaks. If you’ve been hungry for central bank news, I think you’re about to get your fill.
By yesterday, October 6, the yen had climbed back to the exchange rate that prevailed before Japan intervened and then some. The yen closed the day at 82.70 to the U.S. dollar. It’s likely that the yen will keep climbing too—at least in the short term.
The news driving stocks this morning comes from Japan where, overnight, the Bank of Japan announced that it would pursue a “virtually zero” interest rate policy and implement its own version of quantitative easing by setting up a five trillion yen fund to buy government bonds and other debt. The bank set its overnight call rate at 0% to 0.1%, the lowest since 2006.
The U.S. dollar is in a holding pattern so far this morning as the currency markets wait for decisions from Australia and Japan. But after tomorrow I expect the dollar’s decline to resume. On Friday, October 1, the U.S. dollar hit a six month low and I don’t think we’re done yet.
After an initial drop to a one-month low on September 15, the yen is now up 1% since the government intervened in order to drive down its price. The Japanese government put off intervening in the currency markets for so long that traders believe it now has no choice but to attempt again to weaken the yen. Abandoning intervention now would brand the policy a failure and remove any restraint on traders.
Not content with the drop in the yen after the Japanese government decided to intervene in the currency market by selling yen, big Japanese exporters are urging the government to take the yen down further to 90 to the dollar.
And according to the Bank of Japan’s quarterly Tankan survey, Japan’s biggest manufacturers expect that they’ll win this argument.
With the yen climbing to 82.88 against the U.S. dollar—its highest price since 1995—the Bank of Japan intervened in the currency market, selling yen to drive down the price of the currency.
An intervention by the Bank of Japan that fails would be the worst of all policy decisions since that failure would give traders a green light to drive the yen still higher without the fear of a yen intervention in the future.
This morning it’s currencies in the news. That adds uncertainty to a financial market that already is stumbling as it looks for direction
