Strong EUR/JPY jeopardizes ECB monetary policy

Strong EUR/JPY jeopardizes ECB monetary policy, Wednesday, November 5: The EUR/JPY has risen to a seven-month peak and was trading close to its highest point in six years after Bank of Japan (BOJ) governor Haruhiko Kuroda said monetary easing was showing results. The strengthening of the common currency has put European Central Bank (ECB) officials under pressure as we head towards tomorrow’s monetary policy meeting.

The pair was 0.56 percent up at ¥143.280 as of 06:31 GMT, and was trading 3.8 percent above its 50-day simple moving average of ¥137.917. It touched ¥143.426 in earlier trading, its highest level in seven months and within sight of the six-year high of ¥145.676.
The 18-member common currency has gained over four percent versus the yen since Friday, when the Japanese central bank unexpectedly announced it would expand its monetary easing programme. Speaking at the Kisaragi-kai Meeting in Tokyo today at 02:30 GMT, BOJ governor Haruhiko Kuroda said that there was no limit to the measures the central bank was willing to take in order to defeat deflation.

“The latest BOJ announcement made it sound like there isn’t much room left for them to act further because the market would dry up should they buy more JGBS, but with Kuroda’s speech, the message they are ready to take further action has gotten through,” said Fumio Nakakubo, regional chief investment officer for Japan at UBS AG, as cited by Bloomberg. “The view that there’s a possibility the BOJ may ease further is prompting yen selling.”

Market participants will now be looking ahead to tomorrow’s European Central Bank’s (ECB) monetary policy meeting. According to some analysts, Kuroda’s actions have put ECB president Mario Draghi under pressure to implement policy response measures to keep the level of the euro down, in order to boost the eurozone economy.
Robert Rennie, head of currency and commodity strategy at Westpac Banking Corp, was quoted by Bloomberg as saying that Kuroda “has thrown down the gauntlet to Draghi […] Whether Draghi will, or can, accept the challenge remains to be seen.”

Rennie added that unless the ECB president undertakes a large-scale government-bond purchase programme, or quantitative easing, similar to that of his BOJ counterpart, money borrowed cheaply in Japan could increasingly flow into European assets, which would boost the euro.
“The price that Mario Draghi should be most worried about this week is euro-yen,” Jim McCormick, the global head of asset allocation at Barclays Plc in London, told Bloomberg. “The ECB will step up, but things aren’t bad enough for them to do that yet.”
The ECB will release its official interest rate statement tomorrow at 12:45 GMT, while the central bank’s press conference will be held at 13:30 GMT. IG reports that no policy changes are expected, which may have a slightly negative impact on markets.

By Georgi Milenkov
Georgi likes all things shiny; gold, silver, platinum an pirate treasure. Fascinated by the commodities market, Georgi uses his trading experience to report on commodities prices. He now works for Hewlett Packard.

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