BoJ and SNB try to weaken currencies

illustration: dealingroom DNB markets

(04.08.2011) The Swiss National Bank lowered the interest rates further in order to weaken the CHF, while the Bank of Japan intervened in order to weaken JPY. Both succeeded short term but will struggle in the longer term. Elsewhere markets turned somewhat more positive and some key indicators surprised on the upside. Today two European rate meetings are due.

By Knut A. Magnussen, Senior Economist at DNB Markets

Market unrest continues but the sentiment turned a bit less pessimistic yesterday. The European stock markets fell, but the US markets (S&P500 up 0.5%) and the Japanese rose. US long rates rose somewhat yesterday as investors took profit after the marked decline in rates over the past week. However, the ten-year yield is still as low as 2.63%.

The Norwegian bond yield also rose and is now trading at 2.77%. It was positive that Moody’s chose not to lower the US AAA-rating after the debt deal, even if the outlook is still negative. It remains to be seen whether the other rating agencies will do the same. S&P has been very clear that the deficit reduction has to be far higher than became the outcome. The gold price rose to a new record yesterday (1675 USD per ounce), while the oil price (eventually) fell due to the weaker economic prospects. 
The Swiss franc has strengthened markedly recently. In order to try to stop this process the Swiss central bank yesterday lowered its band for the 3 month rate from 0-0,75% to 0-0,25%. Even if this rate adjustment is small, the signals contributed to a weakening of the CHF yesterday. SNB regards the CHF as highly overvalued and said in a statement that further measures (read: interventions) maybe taken.

Bank of Japan eased monetary policy further by increased the asset purchase program and in addition chose to intervene in the FX market in order to weaken the JPY.
The operation succeeded: The USDJPY rose from 77.1 to 78.1 immediately and the weakening for the JPY continued after the move. The central bank is worried over the strong currency which may hamper economic growth going forward. However, it will be difficult for the central banks to obtain their goals by interventions.    
US data yesterday eventually were a bit on the positive side yesterday. The ADP report showed that private employment grew by 114.000 in July – more than expected. Once again small and medium sized enterprises contributed to the increase. Large companies only increased their employment by 9.000 persons. The report points at payrolls growing at 85.000 as expected. ISM for services disappointed somewhat by falling to 52.7. Still the level is well above 50, but only consistent with GDP-growth at somewhat below 2%.  
Data from Europe were also better than expected yesterday. Retail sales in the euro zone rose 0.9% in June – whereas an increase of 0.5% was expected. However, the increase was not strong enough to reverse the drop in May. During the first half of the year retail sales have been practically flat. The underlying drivers (income, wealth and interest rates) are pointing at a continued weak development going forward. PMI for services were revised slightly higher in July and the composite index was hence also better than expected at 51.1.

In the UK the CIPS for services also surprised on the upside, rising to 55.4
and indicating fairly solid GDP-growth. However, the index for manufacturing is still weak.
Today two European rate meetings are due. However tehere are not expected any rate changes or new signals from either ECB or BoE. The former hiked rates in July and signalled further hikes during later this autumn. The MPC in Bank of England is still divided with two members wanting to hike. However, with inflation falling and growth slowing, they may all agree on keeping rates unchanged this time. And the first hike is still far into the future.