Japan Ends 8-Year Negative Interest Rates
Bank of Japan

The Bank of Japan (BoJ) has finally ended its eight-year reign of negative interest rates and shifted to a more conventional policy of targeting short-term interest rates.

Kudos to BoJ Governor Kazuo Ueda for achieving this without dislocating financial markets, ING fx analyst Chris Turner said in a note, adding that a policy rate near 0.1% still leaves the yen vulnerable in a low-volatility world.

Meanwhile, the US dollar has shown little strength over the last 24 hours, reconnecting with the higher short-term interest rate story, Turners said in a Tuesday note.

Analysts notice as well the turnaround in some of investors’ favourite FX trades (e.g., long Mexican peso), which may be profit-taking ahead of tomorrow night’s FOMC meeting and Thursday’s Banxico meeting, where there is a high chance of the first Banxico cut.

Bank of Japan ending its eclectic monetary policy mix with its recent shift. Gone are the negative interest rates, yield curve control and purchases of ETFs and Real Estate Investment Trusts, ING stated.

Instead, excess reserves at the BoJ will now be remunerated at 0.10% and the BoJ will target the overnight call rate (its main policy rate now) in a range of 0.0-0.1%, according to Turner.

The yen sold off on the headlines that the BoJ would keep an accommodative policy for a while, but recent headlines are suggesting that further rate hikes may be forthcoming now that the virtuous link between wages and prices has been confirmed.

The problem for the yen, however, is that volatility remains exceptionally low and the carry trade exceptionally popular. USD/JPY may well trade in a 150-152 range for the time being (locals in Tokyo think the BoJ will not intervene to sell USD/JPY until 155), and a lower USD/JPY will have to be led from the dollar side.

Moving onto today, the US calendar is quiet ahead of tomorrow’s FOMC meeting. With the market now just pricing 68bp of Fed cuts this year, the FOMC could prove a mild dollar negative.

For the time being, however, the risk of the Fed Dots shifting to just 50bp of cuts this year could continue to prompt some modest dollar short covering. One thing to mention regarding today’s data is the housing starts.

Democrats are starting to put pressure on the Fed over the locked-up housing market; no one wants to move home and lose a 3% mortgage rate. A lower housing starts figure could prove a mild dollar negative. DXY may well trade a 103.50-104.00 range today, Turner said. #Japan Ends 8-Year Negative Interest Rates

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