Weekly Review 14/2013

Last week's news were dominated by the Bank of Japan doubling its monetary easing efforts. BoJ governor Haruhiko Kuroda's announcement quickly sent the JPY down on Thursday, giving the currency's downward trend new momentum. The central bank decision is likely aimed at supporting the economy by forcing private citizens and companies alike to dispense their savings in light of future inflation and the BoJ buying up the majority of government bond issuance. The BoJ communicated a 2 percent inflation target within two years. Whether this is sufficient to alter inflation expectations in such a way that the country's chronic deflation problem can actually be reversed remains to be seen. Betting against central bank actions remains a very risky strategy, however. Currency investors will have little choice but to short the Japanese yen, while equity investors may be well-advised to go long the Nikkei 225. At the end of Friday trading, USD/JPY was quoted at ¥97.5, GBP/JPY at ¥149.6 and EUR/JPY at ¥126.7.

In Europe, neither the European Central Bank nor the Bank of England took any drastic actions. Both central banks kept interest rates constant, but ECB president Mario Draghi cautiously hinted at future rate cuts if the economic situation does not improve and governments fail to implement structural reforms.

More important news came from the United States on Friday. US nonfarm payroll employment data disappointed. Only 88,000 new jobs were created in March 2013, way below economists' estimate of 190,000 and marking a nine-month low. New concerns about the economic recovery in the United States were sparked with regard to austerity measures beginning to show skid marks. During the first two months of the year, it seemed as if the US economy would get through the fiscal constraints rather unharmed, but now market observers are afraid the economic recovery might once again stall after a strong start into the year. Consequently, the US dollar dropped in value against most major currencies at the end of the week, with EUR/USD trading at $1.299 (up 200 pips from Wednesday) and GBP/USD at $1.533.

Bank of Japan with new phase of monetary easing

The Bank of Japan announced during Asian trading hours today that it would enter into a new phase of monetary easing. Haruhiko Kuroda, the central bank's new governor, said the BoJ would aggressively purchase long-term government bonds over the next two years to provide liquidity and obliterate deflation. He further said they were targeting to achieve 2 percent inflation in two years' time. Although additional quantitative easing had been expected, the dimension of the announced purchases came as a surprise.

The JPY slumped immediately after the announcement of the BoJ's bold move: USD/JPY traded 2.7 percent higher at ¥95.42, GBP/JPY was at ¥143.85, and EUR/JPY traded at ¥122.05. Right now, there is some profit-taking, but I expect the yen to follow its trend of steady depreciation in the foreseeable future, unless other central banks decide to counter by launching monetary easing programs of their own.