Japanese yen, you have affected my life negatively in the following ways….
Wait a second, that’s not true at all! All kidding aside, as I mentioned in yesterday’s blog, PM Kan was being tested by the markets as to his resolve to intervene in the rising Yen. And last night they did just that, unilaterally selling Yen in an undisclosed amount and intervening for the first time since 2004.
This has caused some major Yen weakness, which is lower against all of the majors by as much as 3%. A stronger Yen was seen as negative for Japanese exports, which would eventually hurt Japan’s competitiveness and thus strangle economic growth.
But now the fun may be just getting started. It will be very interesting to see if the Yen bulls re-group and try to push Yen higher again, or if the US Fed decides that another round of quantitative easing is necessary to “help” the US economy.
This intervention has pushed Asian equity markets higher, though there appears to be no follow through in Europe or the US. So today is a bit of an odd day for currencies, as mild risk aversion is causing US dollar strength, yet there is obvious Yen weakness.
In the forex market:
Aussie (AUD): The Aussie is trading higher vs. the Yen but tracking lower against the rest in what would otherwise be a classic risk aversion scenario. Consumer confidence figures fell for the first time in 3 months, which could give the RBA reason to hold off on rate hikes throughout the rest of the year. (Click chart to enlarge)
Kiwi (NZD): The Kiwi is trading similarly to the Aussie ahead of tonight’s RBNZ rate decision, which is expected to show no change from the current 3%. Recent economic data plus the earthquake may have slowed GDP growth for the quarter.
Loonie (CAD): The Loonie is also mostly lower as manufacturing sales figures came in worse than expected, showing a decline of .9% vs. an expectation of a rise of .2%. In addition, oil has pulled back to a 75 handle as economic uncertainty has increased.
Euro (EUR): In the Euro zone, CPI figures came in mostly in line with expectations showing that inflation is slowing but still gaining despite the austerity measures happening in certain countries. While it’s no secret that economies are slowing, the key will be whether or not they can continue to recover, albeit more slowly.
Pound (GBP): Jobless claims in the UK came in higher than expected showing a 2.3K gain in claims vs. an expectation of a 3K reduction. However, BOE chief King spoke in favor of a “credible deficit-cutting plan” as a key to maintaining accommodative monetary policy. Despite recent CPI data, it is unlikely the BOE will move on rates this year. (Click chart to enlarge)
Dollar (USD): The Dollar is seeing strength this morning as Yen intervention has pushed cash to the greenback. Mortgage applications were down 8.9% and the Empire Manufacturing figures came in lower than expected. So the economic picture here in the US doesn’t look rosy, but risk aversion this morning has had the doubling effect now that Yen is not a safe haven destination as intervention is taking place.
Yen (JPY): Intervention. Say no more. The question now is whether or not the US will increase its own quantitative easing or if the forex market wants to see how committed Japan is to maintaining a weaker Yen. The recent lessons (and losses) of the Swiss National Bank (SNB) may still be fresh in both traders’ and policy-makers’ minds. (Click chart to enlarge)
Ask and you shall receive. I said just yesterday that I thought re-confirmed PM Kan would surprise the market by intervening and it looks like no time was wasted in letting that happen.
But what does this mean for other markets? My guess is that we see some of the usual correlations break down a bit as the market determines the best place for money to flow.
In the meantime, Japan must prepare for “attacks” on its line in the sand, as traders will most likely continue to test Yen levels as risk themes heat up. The global economy appears to be slowing as deficit reduction and reduced consumer demand is a prevalent theme.
Also to consider is what will happen with the Chinese currency, as the US is going to put additional pressure on China to allow its currency to appreciate. This could be the wild-card in the global economic recovery.
Any way you slice it, volatility is on the rise which should make for some exciting trading!
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