Research Team at Rabobank, suggests that the idea that financial markets have now entered a whole new (and potentially very dangerous) stage is quickly taking root. Key Quotes “Since BoJ governor Kuroda announced a negative deposit rate (as part of its new tiered system), the Japanese yen has soared by 7% against the dollar. The main reason: the market saw this action as signaling the start of a series of rate cuts into negative territory, something other central banks may find difficult to ignore. Although staggering the rates applying to excess reserves was supposed to be shielding the banks from direct losses caused by negative rates, the market judged otherwise. Financial sector stocks sold off, risk appetite collapsed and pressure on the ECB and other central banks to ease policy increased. The Currency War in its full regalia. This obviously raises the question whether the market will also give Mr. Draghi the ‘Kuroda treatment’ when he announces a host of monetary easing measures Today. There is a growing body of evidence showing the loss of faith in central banks. For example, the 5y/5y EUR inflation forward has not only declined in tandem with oil prices in the final months of 2015 and first weeks of 2016, but this indicator of long-term inflation expectations even hit a new record low of 1.37% in the past week, despite oil prices having staged a modest recovery. As we have often argued, there is no reason for commodity prices to be so strongly correlated with long-term forward inflation expectations in the first place – unless the latter reflect (liquidity) risk premiums or a lack of confidence in the central bank’s ability to steer inflation towards its long-term goal. And the most discomforting thought of all, perhaps, is that this has taken place amidst the prospect of a further ramp-up in ECB monetary easing.” For more information, read our latest forex news.