Currency Markets' Verdict on Negative Rates: Fail

It looks like Japan was not an outlier. The market's verdict on Sweden's drop to more deeply negative interest rates is in, and it is the same: meh.

Sweden's Riksbank cut rates more than expected to minus 0.5% on Thursday, prompting an instant sell-off in the krona against the euro, the exchange rate to which the central bank pays most attention. So far, so good: but by the end of the day the currency had made back all the loss, and this morning hit its strongest against the euro since before the rate cut.

The Bank of Japan has had the same problem since it surprised everyone by moving to negative rates on January 29. After an initial weakening of the yen from Y119 to Y121.5 per dollar, the currency strengthened to briefly reach Y111.3 on Thursday. It weakened again to Y112.6 amid the broader rebound in risk-taking in markets on Friday morning, but the conclusion is clear: negative rates may be unusual, but don't seem have the magical powers many thought.

As David Bloom, head of FX strategy at HSBC, put it:

We thought in the negative world minus 10 basis points [0.1 percentage point] was really relevant. But we're finding out that minus 10bp is still just 10bp.

And to a currency trader, that's not much. In the "normal" situation of positive rates, cutting 0.1 percentage point - or in Sweden's case 0.15 point - would be seen as a smaller-than-usual action. Currency traders seem to think there is no magic to negative rates, after all, and are disappointed by the size of the cuts.