FX Roundup: Yen slips lower on shock BoJ move

The dollar extended gains against the yen and major currency crosses on Friday, despite less than convincing economic data after a surprise move by the Bank of Japan to introduce negative interest rates for holdings.

US gross domestic product growth slowed sharply in the fourth quarter to an annualised rate of 0.7% from 2% in the third, preliminary data from the Commerce Department showed. This was weaker than the 0.8% expected by economists.

The Commerce Department said it reflected a deceleration in personal consumption expenditures and downturns in non-residential investment, exports, and state and local government spending that were partly offset by a smaller decrease in private inventory investment, a slowdown in imports and an up-tick in federal government spending.

Dennis de Jong, managing director at UFX.com, noted: “The outlook was pretty bright for the Federal Reserve when it raised interest rates for the first time in nearly a decade in December. It’s most definitely gloomier now.

“GDP often goes through peaks and troughs, so it would be alarmist to suggest today’s data is the start of something more serious. That said, it pushes another rate hike in March into the very unlikely bracket.”

Earlier, the Bank of Japan said the country’s official interest rate would be cut from the previous 0.1%, to -0.1%. The rate is what the BoJ pays on cash being deposited there in excess of the legally required minimum reserves.

Officials said the negative rates were brought in to "pre-empt the manifestation of risk and to maintain momentum to achieve the price stability target of 2%".

"We will cut the interest rate further into negative territory if judged as necessary", the bank added in a statement released after their two-day policy camp.

At 1621 GMT, the dollar was up 1.93% against the yen at JPY121.1100, and strengthened its position against major global crosses. The euro was down 1.14% against the greenback exchanging at $1.0815, while the pound also fell 1.32% exchanging at $1.4173.

Forex analysts at Barclays said the enhanced “open-endedness” of BoJ policy with indication of potentially deeper negative rates should reduce concerns on the limits of the qualitative and quantitative programme, helping to alleviate appreciation pressures on the JPY over the coming weeks.

“This is timely and reflects the BoJ’s renewed focus on the JPY as the quantitative durability of QQE was coming under question. In this respect negative interest rates will be a sharper tool. Depressed domestic yields should encourage further portfolio rebalancing outflows, putting pressures on the spot JPY and JPY basis.”

“As the BoJ surprise decision comes at a time when speculative positioning (CFTC IMM) has revealed a move to an increasing net long position in JPY, this suggests there is fresh scope to short the JPY anew,” they added.

The greenback also rose 0.26% against the Canadian dollar exchanging at CAD$1.4066. Concurrently, the Australian dollar fell 0.11% against its US counterpart exchanging at US$0.7076 and the New Zealand dollar fell 0.11% exchanging at US$0.6473.

In Latin America, the dollar rose against major regional crosses, including the Colombian (up 0.50%), and Chilean (up 0.17%) pesos but fell against the Mexican peso (down 0.75%) and Brazilian real (down 0.94%).