This week has been all about interest-rates and this morning has brought something really rather significant. One of the signals of that sort of thing is that few mention it. So without further ado let me hand you over to Switzerland.
The SNB is tightening its monetary policy further and is raising the SNB policy rate by 0.75 percentage points to 0.5%. In doing so, it is countering the renewed rise in inflationary pressure and the spread of inflation to goods and services that have so far been less affected. It cannot be ruled out that further increases in the SNB policy rate will be necessary to ensure price stability over the medium term.
One of the main bastions of the icy cold world of negative interest-rates has left the room. To illustrate the road to Damascus style conversion here let me take you back to the 16th of December last year.
The SNB is maintaining its expansionary monetary policy. It is thus ensuring price stability and supporting the Swiss economy in its recovery from the impact of the coronavirus
pandemic. It is keeping the SNB policy rate and interest on sight deposits at the SNB at −0.75%, and remains willing to intervene in the foreign exchange market as necessary, in
order to counter upward pressure on the Swiss franc.
What a difference 9 months makes. Also I would point out that “ensuring price stability” has in fact turned into this.
Inflation rose to 3.5% in August and is likely to remain at an elevated level for the time being.
Inflation was supposed to be 1%. So we are observing another central banking failure although as you can see partly via the strength of the Swiss Franc Switzerland has so far avoided the worst inflation excesses seen elsewhere.
Also we see a clear change in the view on the Swiss Franc.
To provide appropriate monetary conditions, the SNB is
also willing to be active in the foreign exchange market as necessary.
So after saying it was too strong at 1.20 versus the Euro it is now too weak at er the much higher 0.95? It is hard to know where to start with that. Still they have foreign currency reserves of 884 billion Swiss Francs so should they start it would be quite some time before the ammunition locker looked empty. There would however be consequences for other markets as they bought large quantities of Euro area government bonds and also hold US equities.
Bank of Japan
By contrast the Bank of Japan announced this earlier today.
The short-term policy interest rate:
The Bank will apply a negative interest rate of minus 0.1 percent to the Policy-Rate Balances in current accounts held by financial institutions at the Bank.
The long-term interest rate:
The Bank will purchase a necessary amount of Japanese government bonds (JGBs) without setting an upper limit so that 10-year JGB yields will remain at around zero percent.
So -0.1% and 0% although even “without setting an upper limit” has perhaps the beginnings of an echo of the Swiss in January 2015.
In order to implement the above guideline for market operations, the Bank will offer to purchase 10-year JGBs at 0.25 percent every business day through fixed-rate
purchase operations, unless it is highly likely that no bids will be submitted.
So 0.25% is the new Zero.
The Yen
This was the state of play.
TOKYO, Sept 22 (Reuters Breakingviews)…….The yen , currently trading around 144 per dollar, is at its weakest since 1998, but more important is the rate of change. It has lost 29% since a peak in December 2020, and is down 47% over the last decade due to two quick, steep corrections in 2012 and 2014, respectively.
That was a curious view from someone with a weak grasp of mathematics because the real move has been this year not in 2012 or 14. Thus their view below is flawed too.
That’s a byproduct of Shinzo Abe’s successful war on deflation
Actually the plunge continued and reached another new low this morning as the Yen adjusted to US interest-rates some 0.75% higher and unchanged Japanese ones. It did not quite make 146 before the Bank of Japan started playing The Stranglers on its loudspeakers.
Something’s happening and it’s happening right now
You’re too blind to see it
Something’s happening and it’s happening right now
Ain’t got time to wait
I said something better change
I said something better change.
Intervention Time
There was an early warning.
Japan Top Forex Diplomat Kanda: There May Be Cases Where We Conduct Stealth Intervention ( @LiveSquawk)
According to IGIndex he added this.
WON’T NECESSARILY COMMENT ON WHETHER WE INTERVENED IN MARKET
That lasted less than a few hours.
JAPAN’S TOP FX DIPLOMAT KANDA: HAVE TAKEN BOLD ACTION IN MARKETS
*JAPAN’S KANDA: HAVE INTERVENED IN FX MARKET *JAPAN’S KANDA: WILL MONITOR WITH HIGH SENSE OF URGENCY ( @Investing.com)
If there is a role of top FX diplomat holders of the role have had an easy life since 1998, but not today. The Bank of Japan surged into the currency markets like a bull in a China shop. Through 145 then 144 and 143. That highlights one of the problems of intervening which is that the professional players will withdraw. You can pick off existing orders in the initial wave but after that there will be some option hedges perhaps ( if you are long option volatility then you owe the Bank of Japan a decent bottle of sake) but not much else.After all why take on a central bank?
This is the problem of intervention as I have pointed out before.In the initial stage the central banker can stride around the ring like a heavyweight champion. Indeed with its 8.9 trillion Yen of foreign currency assets to play with we could say like a super-heavyweight champion. The problem is that like a boxer it will run out of puff as it cannot stay there forever. Its reserves are large but in the end they will decline away. So it will have to pick its punches carefully.
By contrast this remains every single hour of the day.
In support of these goals, the Committee decided to raise the target range for the federal funds rate to 3 to 3-1/4 percent and anticipates that ongoing increases in the target range will be appropriate. ( Federal Reserve )
So the carry in favour of the US Dollar will be 3% and rising.That creates another problem because say the Bank of Japan flexes its muscles and pushes the exchange-rate to 140.Then the carry deal is even better because you are buying the US Dollar more cheaply.
Comment
The US Dollar has been something of a wrecking ball in currency markets in 2022. It has sent pretty much everyone else to multi-decade lows exacerbating their inflation problem due to its role as the reserve currency. We have seen Japan respond today in a curious fashion because actually they dislike negative interest-rates and yet they continue to sing along with Toto.
Hold the line
Love isn’t always on time
Whoa oh oh
Hold the line
The problem is that they now find themselves trying to hold the line at 145 Yen as well. Indeed the central planning is out of control as they set not only interest-rates but bond yields then intervene in the equity market because they think it is too low and now in the exchange-rate because it is also too low for them. Is there anything else left?
Also they did try to get to 140 but look what happens when they step back.
DOLLAR/YEN <JPY=EBS> PARES LOSSES, NOW DOWN 0.52% AT 143.34 COMPARED TO SESSION LOW OF 140.3