This article was written by David Dixon and Clive Arneil of Viper Wealth Creation.
Last week saw the Bank of Japan (BOJ) adopt negative interest rates by announcing a charge of 0.1% on some of the funds banks will hold at the central bank. The Japanese have joined the ECB, SNB, Sveridges Riksbank and Danish National Bank in charging to park funds instead of using the money to lend and encourage growth in their respective economies. This means in theory that investors will not want to hold excess euros, Swiss francs, Swedish krona, Danish krona and now Japanese yen so they will sell these currencies on the markets thus devaluing further.
I wonder however, if this market will view the BOJ move as the last in their easing cycle. Consider how the vote was close at 5-4 in favour of the move late last week and how the BOJ Chief Mr Kuroda and other members have talked about the need for more fiscal stimulus from the Abe Government. I am watching this very closely and suspect that we are seeing a superb opportunity to buy JPY at levels we could only dream of just over a week ago, and it may be short-lived.
So what will investors buy? Up until now it has been the mighty greenback that has benefited from other devaluations but we already know the Fed is concerned with the strength of the US$ and the dampening effect this has on inflation which they are targeting at 2% but struggling to achieve. It looks increasingly likely that we will not see four Fed rate hikes this year and an already crowded long US$ market could be close to a correction.
Gold has stayed comfortably above US$1100 even though we saw a rally in equities last week which begs the question has the shiny metal seen the bottom of weakness against the greenback? Could this be the beginning of investors looking for somewhere other than the US$ while other currencies devalue? Worth keeping a close eye on this market with US1145 looking important to me. If the market rallies above here then expect US$1185 quickly with US$1200 on the cards.
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I believe the market will start looking for further easing by the ECB in March and expect to see this push EUR/USD down to 1.0500/50 while the USD/JPY is likely to struggle to get above 121.50/122.00. Therefore I like the look of EUR/JPY at 132 and have gone short here. I also like the like of GBP/JPY above 172 and await the BOE inflation report this coming Thursday with a bias to go short. I have previously been short to good effect the Swissy against yen however I think the CHF may be due a correction at current levels and will wait to see if this pair sees 120 again.
The equity markets found some strength late last week on the BOJ move and could well see further moves higher from here if as I expect Signore Draghi puts the case for further ECB action. The hurdle in the first part of the week is Chinese manufacturing figures and on Friday NFP in the States. Are we due a disappointing NFP number and even if that does not happen where is the increase in wages that strong job take ups should bring? The greenback looks toppish here and the chance to unwind the long USD/JPY trade may be at hand.
So to sum up I expect more central bank help in stabilising equity markets including more dovish rhetoric from Fed members which is likely to see a correction in the US$ with the yen to benefit most from these levels on unwinding of old positions and safe haven buying when the next bout of stock market weakness occurs. It also looks possible that the Nikkei could benefit from BOJ actions and therefore draw in foreign investors meaning potential JPY demand even when equity markets gain.
Keep it tight
Clive Arneil, Viper Wealth Creation
Worked for major brokers for over 20 years trading most instruments in the foreign exchange and derivatives markets.
Brokered deals on behalf of some of the world’s largest banks including Barclays, Citibank, UBS, NatWest and the Bank of England.
Worked mainly in the UK but also in Switzerland, Germany and the U.S.
Retired from the money market at the age of 40 and then worked as a financial data feed specialist supplying market data to banks, brokers and spread-betting companies.
From there he went on to teaching people the skills required to master today’s volatile markets not just in the U.K but also in Singapore, Dubai, South Africa, Germany and Italy.
David Dixon, Viper Wealth Creation
1980 – 2000, NatWest spot, forward and derivatives trader.
Responsibilities included taking on proprietary positions on behalf of the bank in the ‘interbank market’ with trades in multiples of millions of dollars, and on occasion billions.
2000 – 2006 he advised corporate and private clients on various financial matters.
2006 – present, David has been working with Clive.