The Japanese yen is the only currency standing weaker vs. the dollar so far this week, but with the street littered with the bodies of frustrated yen bears over recent years, it pays to take this move with some caution. The Bank of Japan overnight chose to keep everything steady after the policy meeting overnight and there was no surprise with that. Nevertheless, yesterday’s GDP data did show the economy weakening substantially and that was even before the earthquake and tsunami hit in March. The current quarter is likely to see a more widespread impact on the economy, both from the household spending side but also from the ongoing power cuts which are still blighting certain areas of the country and disrupting production. Being the world’s largest creditor nation for the past twenty years, it’s capital flows that matter and invariably more so than the short-term fluctuations of the economy. More recently, the weekly data on net purchases of overseas shares has shown the 4-week average turn positive for the first time this year, suggesting little in the feared repatriation flows. Furthermore, this is combined with an uncomfortable level of dollar shorts, not just vs. the yen but many other currencies besides. Any further weakening of the yen is likely to be despite, not because of, the current economic weakness.
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Commentary
Sterling’s anaemic performance continues. The pound continued to drag its feet during Thursday, despite the weaker dollar tone that emerged. Whilst retail sales data was firmer than expected in April, markets were relatively unimpressed, given that much of this was put down to the warm weather, alongside the royal wedding which produced one extra public holiday and many other days off in-between. Furthermore, the CBI Industrial Trends survey reflected a relatively subdued manufacturing sector, with the total orders balance only partially recovering from the weakness seen in April. Although cable was able to recover back to the 1.62 level, sterling struggled to hold its own vs. the single currency. This appears to be the new trend right now, with even stronger data failing to ignite the currency as concerns over the longer-term sustainability of growth dominate.
US data proves to be modestly disappointing overall. The main standout for Thursday was the softness seen in the Philly Fed manufacturing survey, the headline falling to 3.9 for May, from 18.5 previously. This is the second monthly decline from the 43.4 high seen in March of this year and was set against the backdrop of a modest fall in existing home sales of 0.8% in April. This served to knock the wind out of the positive tone to equities seen in the early part of the NY session, with the dollar largely neutral on the data.
China’s demand for gold surges in the first quarter. The latest data from the World Gold Council showed demand from China surging in the first three months of the year. China and India combined now account for half of investment demand for gold, with China having overtaken India in the first quarter. Contrast this with 2007, when India accounted for 61% of the physical demand for gold, vs. just 9% from China. Yes, China is becoming more affluent, but much of the Q1 surge was owing to increased fears of inflation and this has increased demand for gold bars and coins amongst Chinese investors. All this comes despite the fact that gold rose only 2% in the first quarter, totally outshone by the performance of silver. Furthermore, ETF investments in gold fell by more than 6%. Still, the data for India and especially China show that the metal still has some solid underpinnings, which are likely to continue in the face of continued high inflation in China.
Yuan gaining as PBOC voices inflation concerns. PBOC governor Xiaochuan described inflation as high overnight, keeping alive the notion that the PBOC will become more tolerant of yuan gains as one tool in the armoury to keep a lid on inflation. The yuan rose by the most in two weeks overnight, nudging back below the 6.50 level.
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