Last night’s decision by the G7 to intervene to prevent the Japanese yen from strengthening is both intelligent and necessary. At a time when the major advanced economies are still concerned about the sustainability and durability of their recoveries (with the exception of Germany), Japan’s tragic misfortunes will undoubtedly hobble the economy for some time to come. As such, the 5% appreciation of the yen against most major currencies over the past week was merely compounding the post-disaster economic and financial misery the country is already experiencing.
Guest post by FxPro
The G7 recognised that it could not afford for the world’s third-largest economy to slide back into recession. USD/JPY, which yesterday morning fell to a record low of 76.36 before ending the New York session at around the 79.0 level, is now just shy of 82.0. Just prior to last week’s earthquake, USD/JPY was trading at around the 83 level, so most of the gains of the past week have been given back.
From early reports, the intervention has been heavy, possibly as much as $35bn, which puts it in the region of last September’s foray by the BOJ. Japan’s FinMin Noda claimed that the ECB would be undertaking further buying of EUR/JPY on the European open which, at the time of writing this morning, is not evident. The Nikkei has responded positively, up nearly 3%, while other Asian bourses are also higher.
Commentary
Risk-taking returns as fear subsides. Buoyed by hope that Japan is close to restoring power to the Fukushima nuclear plant, and by some cheery economic news out of the US (see below), those who rushed to take risk off the table over the past week were re-considering. The major European bourses jumped 2% yesterday and may well be higher again today; long-dated government bond yields were around 10bp higher in the major markets, and safe-haven currencies like the Swissie and the yen gave back some of their gains. Another major driver of fear-aversion was the announcement that the G7 would be having a conference call in the Thursday evening, sparking concern that the MOF may well be contemplating intervention to at least slow the rapid rise of the yen.
Interestingly, high-beta currencies such as the Aussie and the South African Rand have not performed too badly, considering the doom and gloom and the rapid retreat in risk. This is partly because, although equity-risk premiums rose sharply in recent trading sessions, commodity prices generally remained resilient. Indeed, against the backdrop of growing alarm at the situation in both Bahrain and Libya and the potentially destabilising geo-political ramifications for the region, it is no surprise that the oil price is climbing rapidly once more. Brent crude is back at $116 a barrel – two days ago, it was down at $107! Last night’s decision by the UN to impose a no-fly zone over Libya boosted the oil price by another $2. Also noteworthy over the second half of this week has been the decent performance of both the euro and the pound, helped by consistent buying from US money managers. This is despite a gradual watering-down of BOE and ECB interest-rate expectations. The EUR is back through 1.40, while cable is back above 1.61 after the 1.60 level offered powerful support. Despite the incredible financial pessimism consistently expressed by those who still live in this country, the currency refuses to go lower.
More cheer from the US economy. Against the gloomy and tragic backdrop of Japan, the economic news emerging out of the US is still relatively bright, providing further support to the view that the Fed is unlikely to engage in another round of quantitative easing after the expiry of QE2 in June. Initial jobless claims dropped 16K in the week ended March 12th to 385K – the four-week moving average for claims is now at its lowest for nearly three years. March’s Philly Fed general activity index of 43.4 was well above expectations, and the highest reading since 1984. Manufacturing production was 0.4% higher in February, aided by a 4.2% jump in auto production. FedEx also reported that profits in the current quarter were well above expectations, helped by strong domestic and foreign demand.
Rising inflation expectations will be on the MPC’s radar. The Bank’s Monetary Policy Committee will be very much aware that the rise in actual inflation is feeding through more visibly now into expectations. Yesterday’s quarterly survey of inflation expectations (conducted by the BOE) showed that consumers expect inflation to climb by 4.0% in the next year, the highest reading since August 2008. At the same time, very few respondents to the survey suggested that they were pushing for higher wages as a result of higher inflation. Nearly two-thirds of respondents expect the Bank to start lifting the base rate over the next year.
Looking Ahead
Friday: GER: Producer Prices, February (previous 1.2% MoM and 5.7% YoY); EC: Trade balance, January (previous -€2.3bn); IT: Industrial Orders, January (previous 5.4% MoM); CAN: CPI, February (previous 0.3% MoM).
Monday: UK: Rightmove House Prices, March (previous 0.3% MoM and 3.0% YoY); FR: PMI Manufacturing, March p (previous 59.7); PMI Services, March (previous 59.7); US: Chicago National Activity Index, February (previous -0.16): Existing Home Sales, February (expected 5.15m, previous 5.36m).
Tuesday: JPN: All Industry Activity Index, January (expect 2.4%, previous -0.2%); UK: CPI, February (expect 0.6% MoM and 4.2% YoY, previous 0.1% and 4.0%); PSNCR, February (previous – £14.4bn); PSNB, February (previous – £5.3bn); CBI Trends Total Orders, March (-8); US: Richmond Fed Manufacturing Index, March (expect 22, previous 25).
Wednesday: UK: MPC Minutes; UK Budget; EC: Industrial New Orders, January (previous 2.1% MoM and 18.5% YoY); Eurozone Consumer Confidence, March; US: New Home Sales, February (expect 295K, previous 284K).
Thursday: JPN: Merchandise Trade Balance, February (expect JPY709bn, previous JPY192bn); FR: Business Confidence, March (previous 106); GER: PMI Manufacturing, March a (expect 62.0, previous 62.7); PMI Services, March a (expect 58.1, previous 58.6); EC: PMI Manufacturing, March a (expect 58.2, previous 59.0); UK: Retail Sales, February (expect -0.5%, previous 1.9%); US: Durable Goods Orders, February (expect 1.0% MoM, previous 2.7%); Initial Jobless Claims (previous 385K); Bloomberg Consumer Comfort.
Friday: FR: Consumer Confidence, March (previous 85); GER: GfK Consumer Confidence, April (expect 5.8, previous 6.0); IFO Business Climate, March (expect 110.5, previous 111.2); US: GDP, Q4 revision (expect 3.0% SAAR, previous 2.8%).
Source: Bloomberg
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