Bank of Japan rate cut sends yen tumbling

TOKYO/SYDNEY, Feb 1 (Reuters) – The yen nursed broad losses on Monday and the euro struggled for traction after the Bank of Japan adopted negative interest rates, heightening expectations that the European Central bank will ease policy too, making European bond yields slide. The S&P 500 gained 46.88 points, or 2.48%, to 1,940.24 and the Nasdaq Composite rose 107.28 points, or 2.38%, to 4,613.95.

The dollar was up 0.6 percent against a basket of currencies at 99.174, though still down slightly on the week.

European shares tracked Asian stock markets higher, with the pan-European FTSEurofirst 300 index up 0.9 percent, having fallen 1.7 percent on Thursday.

The BOJ governor told a news conference that the central bank would do whatever it takes to achieve inflation at 2 percent.

Some have characterised the ECB’s and the BOJ’s lurch into negative territory as “currency warfare” By keeping their currencies “cheap as chips” its felt Europe and Japan are gaining an unfair advantage, particularly in the Global Export markets. “Yes, the BOJ has surprised with the introduction of negative interest rates”.

Meanwhile, weaker than expected growth figures in the United States were seen as likely to put the brakes on the pace of any interest rate hikes in the USA this year.

The U.S. currency advanced as high as around ¥121.70 in overseas trading on Friday, also taking heart from data showing that the U.S. economy grew at an annualized rate of 0.7 percent in price-adjusted real terms in October to December. Michael Pearce, global economist at Capital Economics, notes that transporting and storing bills and coins is costly – equal to a 2 percent fee, he calculates.

The West Texas Intermediate for March delivery moved up 40 cents to settle at $33.62 a barrel on the New York Mercantile Exchange, while Brent crude for March delivery increased 79 cents to close at $34.74 a barrel on the London ICE Futures Exchange. Good earnings reports from American companies like Microsoft, after others disappointed, helped propel the markets, said McKinley, as did rising oil prices.

But after a survey of Chinese manufacturers showed factory activity in the world’s second-largest economy contracted for an 11th straight month in January, the yen’s fall abated and it traded flat at 121.15 against the dollar.

The price of Federal Fund rate futures are pricing in barely one rate hike this year while the rate-sensitive US two-year yield fell to three-month low of 0.766 per cent on Friday. More stimulus is needed locally, so why not settle for a break?