- Japanese stocks are higher and the yen weaker after low CPI.
- Asian markets are generally showing gains - China underperforms.
- Danish central bank hikes by 10bp following interventions to support the krone.
- Focus Friday was on the ECB announcement of the first 3Y LTRO repayments. Markets Overnight
Japanese inflation data came in broadly as expected with CPI excl. fresh food printing -0.2% y/y in December. However, the market impact was still significant with stocks rallying (Nikkei up 2% at the time of writing) and the yen weakening, sending USD/JPY above 90.
There may not have been any major surprises in Friday’s CPI report but it confirms the view currently priced in the market that the Bank of Japan will have to deliver significant monetary easing (and likely more than already announced) in order to reach the new 2% inflation target any time soon. The outlook of further easing as new members join the Bank of Japan and as it becomes clear that more needs to be done in order to reach the inflation target is the key argument behind our continued bearish yen view. Minutes of the December meeting were also published overnight.
In the US, the S&P 500 briefly reached 1500 intraday as initial jobless claims came in lower than expected at 330k (4W MA fell to 352k, the lowest since early 2008) and as earnings are generally supporting the market. Apple (AAPL) disappointed Thursday, sending the share 12% lower, but overall about 75% of the 134 companies in the S&P500 that have released earnings so far have exceeded profit projections, according to Bloomberg.
The Danish central bank (Nationalbanken) Thursday hiked interest rates by 10bp following interventions on the currency market to support the krone. The interest rate on certificates of deposit was raised to -0.1% from -0.2% and the lending rate to 0.3% from 0.2%. The current account rate was left unchanged at 0%.
The Danish krone had weakened ever since the announcement of ECB’s OMT programme and the introduction of negative interest rates in Denmark late last summer. However, it was not until the 10 January ECB meeting and after European money market rates began moving higher that EUR/DKK truly was pushed above the 7.46038 central parity.
EUR/DKK continues to trade above 7.46 after the hike and hence remains in the "intervention area." A normalisation on European money markets would sustain upwards pressure on EUR/DKK and hence should be expected to trigger further independent Danish rate hikes. Markets are roughly pricing another 10bp hike by March and a further 10bp in May.
We will have a better idea about whether this is too aggressive when we know how big ECB LTRO repayments will be and how much intervention triggered the Danish hike (January intervention numbers are published on 4 February). Potential safe haven outflows from Denmark should also be monitored.
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