special reports

Bank of Japan Surprises Forex Markets, Cuts Interest Rates to 0.30% (Euro Open)

Friday, 31 October 2008 05:47:52 GMT  |  Ilya Spivak, Currency Analyst

The Bank of Japan offered a somewhat bizarre 20bp rate cut, brining borrowing costs to 0.30%. The Euro and Pound saw blistering volatility in overnight trading, with the latter moving a whopping 267 pips in just 2 hours. Euro Zone Consumer Prices Index data dominates attention in the forthcoming session, with expectations calling for the slowest reading in 8 months.

Key Overnight Developments

• Bank of Japan Cuts Interest Rates to 0.30%
• Japanese Manufacturing PMI Hits 4-Year Low


Critical Levels 



The Euro ended Asian trading largely unchanged, sinking as low as 1.2744 only to retake the 1.28 mark late into the session. Sterling price action saw blistering volatility, dropping as low as 1.6222 only to rise as high as 1.6489 just 2 hours later. Prices settled just above 1.6350 ahead of the European trading open.


Asia Session Highlights 



A long line of Japanese economic data releases painted a grim picture of the world’s second-largest economy. Nomura/JMMA Manufacturing PMI printed at 42.2 in October, showing sentiment sank to the lowest in at least 4 years (and the lowest on record). Most notably, overseas orders fell a whopping 7.9% as the specter of worldwide economic slowdown sees shrinking demand for Japanese goods abroad. The Jobless Rate fell to 4.0% as employment seekers unable to find employment gave up and dropped out the labor force, while the ratio of available positions to applicants fell to the lowest in 7 years. Household Spending fell -2.3% in the year to September, the seventh consecutive decline.

The Bank of Japan responded with a done of monetary easing in an attempt to reboot spending and investment, lowering borrowing costs to a somewhat bizarre 0.30%. While the headline Consumer Price Index stalled at an elevated 2.1% in the year to September, Maasaki Shirakawa and company have long made clear that inflation has to take a back seat to growth for the moment. The policy board was split 4-4 ahead of the decision, with Shirakawa breaking the tie. Policymakers also announced they would begin paying interest on reserve deposits to boost liquidity.

Thawing lending conditions were on display in Australia as Private Sector Credit grew a greater-than-expected 0.7% in September. Indeed, overnight borrowing costs have fallen to the lowest in over four years since the credit crunch was attacked in earnest with coordinated actions by the G7 nations while the RBA slashed interest rates by a whopping 100 basis points. Still, the annualized figure now stands at 10.1%, the lowest in over 6 years. Australia’s real estate market continued to suffer as HIA New Home Sales fell -1.8% in September, the sixth negative reading over the last 9 months.


Euro Session: What to Expect 



The economic calendar is fairly light in European hours, with the first estimate of October’s Euro-Zone Consumer Price Index the only substantially market-moving item on the docket. Expectations call for a reading at 3.3%, bringing inflation to the lowest level in 8 months. The pace of price growth has slowed 12.2% since peaking in with oil in July when crude traded above $147/barrel. Slowing inflation opens the door for the European Central Bank to step up the pace of interest rate cuts as the 15-nation currency bloc inches closer towards recession. The market is currently pricing in a 0.50% rate reduction at the bank’s next meeting on November 6th. The EZ Unemployment Rate is expected to remain unchanged at 7.5% in September having risen 14.7% over the last 5 months. The jobs market is likely to continue to suffer as European companies cut back labor expenses in preparation for the leaner period ahead. Indeed, yesterday saw a composite survey of EZ economic sentiment sink to the lowest in 15 years.



To contact Ilya regarding this or other articles he has authored, please email him at ispivak@dailyfx.com.

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