Tag Archives: Japanese yen

No Hope For The Dollar?

A very ugly batch of data today from the US, particularly the new spike in jobless claims, will have the market cooking up fresh imaginings of QE to infinity. Here’s a fresh update from Saxo Bank.

“At some point, it becomes a very fearsome thing to contemplate a disorderly demise of the world’s reserve currency and what that could mean for the world’s markets.”

John J. Hardy


It’s a perfectly timed question, as the USD struggle to recover from a three-year low, and the US FED signals zero interest rate practically forever if necessary. So, what does Thursday’s data mean for risk appetite and for the USD – could it be slightly supportive in the near term, or is there simply no hope for the greenback?


“Remember in our look at the last couple of FOMC meetings, that the pattern we saw in both rates and in the USD. Those meetings produced a short additional weakening in an already weak USD, followed by a period of consolidation. So far, the pattern is holding,” FX strategist John J. Hardy writes in an update.

Adding: “This time around, Bernanke did all he could to make us all want to run out and buy survival supplies and alternative investments with every greenback we could scrounge up. The question is what percentage of the market has waited until this point to get short of the USD, considering the very stretched move we have seen up to this point. In the nearest term, in other words, there could be more risk of a two-way market developing as long as the market’s largest participants (central banks and others) don’t press the panic button.”

A Disorderly Demise of the Dollar?

But beyond the immediate term, we have to wonder, Saxo Bank concludes.

“As our Chief Economist pointed out in a column this morning, whether this latest performance from Bernanke and company raises the risk of a true USD crisis rather than just a USD slide. While this game of everything up versus the greenback has so far been a relatively risk benign development – at some point, it becomes a very fearsome thing to contemplate a disorderly demise of the world’s reserve currency and what that could mean for the world’s markets,” Hardy writes.

Odds and ends


It is increasingly clear from the stream of data from Japan that the economy took a very serious hit.

The overall household spending level for March was out overnight at -8.5% YoY and the Industrial Production figure for the month was down a stunning -15.3% MoM.

These data only include the effects of the first three weeks of the crisis.

“The market may be willing to give the country some leeway and wait for the May numbers to see how well things are bouncing back, but until then, the sheer magnitude of the fallout is frightening. Meanwhile, the push and pull of the bond rally (JPY supportive) and the worry over sovereign debt levels (JPY negative) is seeing plenty of churning in JPY crosses,” Saxo Bank notes.

Just More Trouble

New Zealand’s RBNZ threw the market a surprise in stating that it expected the cash rate level would be “appropriate for some time”, as it noted that the “outlook for the New Zealand economy remains very uncertain following February’s Christchurch earthquake”.

“The market wasn’t particularly well positioned for this and the NZD was weaker across the board – even against the US dollar relative to yesterday’s levels.”

NZD/USD:

This chart looking toppish for the moment with divergent momentum after the RBNZ looks to stay on hold longer than the market expected.

“The 80 level is also a psychological barrier for the market. But look how far we have come over the last several weeks – it would take quite some doing to reverse the trend. If 80 fails on the close today, we may have to shift the focus to support a bit further to the south,” John Hardy points out.

Very Ugly and Downright Awful

A significant bite was taken out of the pound’s rally against the USD overnight on the release of a very ugly GfK confidence survey, which showed a strong dip to -31, the lowest level since early 2009.

“The UK is in a very similar boat as the US – though the UK government at least taking a step in the direction of austerity while US politicians are divided on even inconsequential budget moves still seems to be giving sterling a premium. But eventually, a sovereign debt crisis theme could weigh as heavily on the pound as well,” Saxo Bank comments.

Today’s US jobless claims data was downright awful.

“We can always toss the GDP data out the window as yesterday’s news, but the weakness is still remarkable considering the massive support from the FED and from the Obama stimulus that provided a strong tailwind from the turn of the year. But the weekly initial jobless claims number has to make us all uncomfortable with the prospects for the US job market, as this week’s claims are the highest since January and now we have three 400k+ readings in a row,” Hardy writes.

Looking Ahead (Trying)

“As US long treasuries are rallying to new local highs (lows in yield) today in the wake of the weak US data, we have a 7-year US treasury auction that offers another test of demand for treasuries, which still appears rather robust at the moment (a phenomenon that continues to stick out like a sore thumb considering developments in other markets, perhaps reflecting the increasing signs of a weakening in the US economy, not to mention the background excuse of FED buying, though it’s important to remember that treasuries sold off consistently for a long time once QE2 became a reality).”

Yesterday’s 5-year auction saw results in line with recent averages despite the uncertainty of the FOMC proceedings that took place in the auction’s wake.

“Could a strong bond market and a weakening risk appetite today pummel some of the pro-risk JPY crosses? Also – is the ugly US data USD bearish because of an increased likelihood the market prices in of QE3+ or is it USD supportive for a little while considering how far we have already come and due to the potential for some risk aversion?” Hardy writes.

And perhaps the most valuable trading tips of today:

“Be careful out there – volatility potential is higher than ever. Don’t forget that tomorrow is the last trading day of the month and could therefore see strong end-of-the month fixing flows.”

John J. Hardy

John J. Hardy is Consulting FX Strategist for Saxo Bank.

John has developed a broad following from his popular and often quoted daily Forex Market Update column, received by Saxo Bank clients and partners, the press and sales traders.

Read also: Saxo FX Monthly April 2011.

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By the way, here’s Saxo’s latest update on equities:

“The first quarter earnings season continues in a strong way – with 224 S&P 500 companies having reported so far and 77% of these having surprised to the upside. Peter Garnry, Equity Strategist, Saxo Bank takes a look at some of the strong performers across a few sectors. He discusses the earnings from Amazon and UPS, which are both benefiting from more consumers buying products on line, plus European banks which are now well into their quarterly reporting but are struggling more than their U.S. counterparts. He also comments on automakers like Ford Motor which reported its best earnings since 1998 and a possible sales boost for U.S. and European car makers collectively due to the post earthquake production and supply struggles of their Japanese competitors. Volvo is also mentioned in terms of an emerging heavy vehcile replacement cycle.”

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Forex Strategy In The Irish Aftermath

Here’s some tips on how to navigate in the foreign exchange market the coming week in the aftermath of the Irish bailout drama. Reports and analysis from Saxo Bank, DnB NOR Markets and others.

“EUR gapped higher as trading kicked off but then hovers in Asia; S&P cuts New Zealand’s outlook to negative.”

Andrew Timothy Robinson


“We started the week off slowly in Asia with only minor data to whet the appetite. The European session is also quiet with Swiss money supply the only release while the US session has the Chicago FED Index and a late euro zone consumer confidence to cope with,” Saxo Bank’s FX spesialist Andrew Robinson writes.

In weekend developments, Ireland bowed to EU pressure and requested a bailout package and its related conditions.

“Initial announcements suggest a bailout to the tune of €80-90 bln with a 4-year plan to reduce the budget deficit by 2015. The final rate is still being negotiated but will certainly be better rate than currently available in the markets,” Robinson at Saxo Bank ponts out.

Adding: “The response from G7 finance ministers was positive, saying “The coordinated action of European countries and the IMF reflects our shared resolve to act swiftly and decisively to mitigate emerging risks, maintain market stability, and safeguard the global recovery”.

The initial reaction saw the EUR open 40-50 ticks higher in Asia from the NY close though other risk pairs failed to catch the wave to the same degree.

Asia struggled to press on with the gains with a Tokyo holiday tomorrow curtailing trading interest.

In addition the US Thanksgiving holiday on Thursday tempered interest.

“The Thanksgiving holiday causes most of the data activity to be bunched into the first half of the week – but not today,” Andrew Robinson writes.

Andrew Robinson

“Midway through the session ratings agency S&P announced it was switching its outlook for New Zealand’s foreign currency rating, and those of 6 related agencies, back to negative. The agency said the outlook revision reflected its recognition of the risks stemming from New Zealand’s projected widening external imbalances in the context of the country’s weakened fiscal flexibility while the vulnerability to external shocks, arising from its open and relatively undiversified economy, also raised risks to the country’s economic recovery and credit quality.”

However, a range of factors ameliorates some of these risks, the agency added, including a high degree of foreign-currency-debt hedging and an actively traded currency.

“New Zealand has independent and effective monetary policy settings with a highly traded and free-floating currency that allows external imbalances to adjust. Despite this, NZD tumbled one big figure versus the dollar and was weaker on most crosses.”

Here’s a copy of Monday’s FX report by Saxo Bank.

Oversold Euro

From today’s Gartman Letter:

“Note then the chart of the EUR vs. the US dollar in hourly terms at the upper left this page. The fact that the EUR made its low last Tuesday at or near 1.3540 and that it has rallied all the way to 1.3750 is impressive, taking the EUR from having been rather egregiously over-sold to the point where it is not modestly overbought. We’ve noted again the 50-62% retracement region… the area we call “The Box” … of the bearish move against the EUR that took the EUR from 1.4250 to 1.3450. The market has some way yet to rally just to get to “The Box” and so we shall not be surprised to see it rally a bit more in the course of the next few days. However, our propensity shall be to sell that strength rather than buying weakness. We’ll wait, however, until the EUR rallies back to The Box before taking such action. We can and we will be patient,”

Here’s a copy of the full analysis.

THE WATCHLIST – UPCOMING SESSION:

  • Swiss M3 Money Supply (0800)
  • Denmark Consumer Confidence (0830)
  • HK CPI (0830)
  • US Chicago Fed Nat. Activity Index (1330)
  • EU Euro-zone Consumer Confidence (1500)
  • US Fed’s Kocherlakota to speak (1830)

(All Times GMT)

See also:

DnB NOR Markets, Weekly Update, Foreign Exchange Market. 11222010.

DnB NOR Markets. Weekly Update. Scandinavian Macro. 11222010.

Saxo Bank. Wake-up Call. 11222010.

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Currency: The Weapon of Choice in Trade Wars

During the European debt crisis, in a matter of days, the dollar strengthened by around 10%. The weakness of the Euro and resultant appreciation of the Renminbi by over 14% reduced Chinese exporter’s earnings and competitiveness. Some of the moves reversed equally quickly when markets stabilised. Volatility of currency exchange rates has increased markedly in recent months.

“The US dollar has no enemies, but is intensely disliked by its friends, especially key investors like the Chinese.”

Satyajit Das


“To paraphrase Oscar Wilde, the US dollar has no enemies, but is intensely disliked by its friends, especially key investors like the Chinese,”  author Satyajit Das writes in a blog post at the EUROintelligence.com, Monday. “The Euro is now the “Drachmark”  – a derisory combination of the former Greek Drachma and German Deutschemark,” he adds.

The former trader, and author of the “Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives,” goes on:

Investors assumed that the Euro would be a new Deutschemark, supported by German commitment to fiscal and monetary rectitude avoiding Gallic and Mediterranean extravagance. Instead, investors have been left holding a currency underpinned by unexpected German extravagance and Gallic and Mediterranean rectitude.

Despite sclerotic growth, public debt approaching 200% of GDP and a budget where borrowing is greater than tax revenues, the Japanese Yen has risen to its highest level against the dollar in 15 years. China is even switching some of its currency reserves into Japanese government bonds with returns only apparent under powerful electron microscopes.

Fears about the value of any currency have seen a resurgent interest in gold. Traders are now reading their John Milton: “Time will run back and fetch the age of gold.”

Amongst currencies, it is simply a race to the bottom. On 27 September 2010, the Brazilian Finance Minister Guido Mantega stated the obvious speaking of an “international currency war” as governments around the globe compete to lower their exchange rates to boost competitiveness.

Arcane currency shenanigans point to deeper, unresolved economic issues that policymakers are unwilling or unable to confront but whose resolution is crucial to a sustainable recovery and growth.

Since the end of the de facto gold standard and Bretton Woods, currencies increasingly have become weapons of choice in trade and economic wars. In the German and Japanese model of economic development, an undervalued currency is a key mechanism for maintaining competitive costs and high levels of exports to drive growth. Successive generations of emergent countries, most notably China, copied the model.

Despite tensions, the model worked well in a world of strong economic growth and increasing trade. It was a question of dividing growing wealth. The model is more problematic in a world of low growth.

Currently, the world may be entering a period of lower growth. Consumer spending, funded in developed countries by debt, has slowed. Given significant over capacity in many industries, business investment is weak. Under increased pressure from money market vigilantes, governments are cutting spending and raising taxes, embracing the “new austerity”.

As growth slows, maintenance of competitiveness requires businesses to manage costs brutally.

Cheaper currency values assist in remaining competitive, avoiding the need to overtly cut costs by reducing wages or cutting benefits, explicitly lowering living standards.

During the global financial crisis, the repeated manoeuvring of China, Japan and Germany to maintain the low value of the Renminbi, Yen and Euro against the dollar was designed to maintain export volumes to cushion the worst effects of the recession.

To a large extent, it reflects the underlying structure of economies heavily geared to exports.

Angela Merkel has repeatedly stated that she sees no change to the export driven German economic model in the near term. For Japan, falling living standards combined with an ageing, falling population means increasing dependence on exports.

For China, increasing wages pressures and domestic inflation means that rising production costs must be offset by other means, including an undervalued currency.

The problem of shifting models is great. In 1985, the Plaza Accord forced Japan to effectively revalue the Yen, setting off a rise from Yen 230 per dollar to Yen 85 per dollar.

The rise in the Yen reduced Japanese export competitiveness and led to a recession. To stimulate the economy, the Bank of Japan and Government pumped large amounts of money into the economy.

Rather than assisting recovery, the money set off a commercial real estate and stock market boom that collapsed spectacularly at the end of 1989 plunging Japan into the “ushinawareta junen” – the Lost Decade.

Aware of the Japanese experience and at risk of repeating the experience, China has fervently resisted revaluing its currency, despite pressure from the US. Recently, Chinese leaders have spoken about the economic and social catastrophe that would result from a major renminbi revaluation.

Chinese Premier Wen Jiabao told an European business conference that: “If we increase the yuan by 20 percent-40 percent as some people are calling for, many of our factories will shut down and society will be in turmoil. If China’s economy goes down, it’s not good for the world economy.”

In order to forestall, European calls, led by French President Sarkozy, for a revaluation of the Renminbi, Wen cunningly voiced support for Chinese purchases of Greek debt.

Wen urged Europe not to “join the choir to press China to allow more yuan appreciation.”

The unstable currency order creates distortions, frequently preventing action to deal with economic problems. It leads to countries pursuing odd and sometimes contradictory policies.

For example, financial triage, cutting the unsustainable and unlikely to survive countries out of the Euro, would restore their competitiveness through devaluation. But Germany is unlikely to allow weaker countries to leave the common currency precisely to avoid a sharp increase in the value of the Euro, making its exports less competitive. Contrary to popular view, the Germany has much to lose from changes in or abandonment of the Euro.

Recent German economic performance has benefited from the effects of a stronger Yen relative to the Euro making its exports more competitive. German corporate profitability has recovered strongly to pre-crisis levels.

More recently, Japan has intervened in currency markets to prevent the Yen testings its 1995 high of Yen 79.75 against the dollar.

Interest rate policies pursued, in part, to manage currencies also perpetuate economic dislocations.

Paralleling the events after the Asian monetary crisis in 1997/1998, the flight to dollars during periods of European instability pushes down interest rates on U.S. government debt. Paradoxically, lower interest rates reduce pressure for deficit reduction by lowering the cost of servicing public debt.

Major reserve currencies, like the dollar, Euro and Yen, provide some ability to offset changes in value by invoicing trade in their own currencies. Unfortunately, for minor currencies, the fact that trade continues to be denominated in the major currencies creates difficulties where a one day move in foreign exchange markets can wipe out the entire profit margin.

The higher volatility means that the cost of hedging the risk of such currency moves is large, reducing profitability.

The currency crisis highlights the “beggar thy neighbour” policies pursued by many economies. China, Japan and Germany have consistently pursued policies that emphasise high domestic savings, low domestic consumption and an undervalued currency to drive its export driven economies.

These global imbalances contributed significantly to the current financial problems.

A global economic order where a few countries save and lend to finance their exports while other countries act as consumers of last resort is unsustainable.

A system where each country seeks to maximise its own competitive position and financial security at the expense of trading partners is not viable.

 

Satyajit Das

 

An emerging toxic combination of inflexible global currency arrangements, a destructive cycle of currency devaluations, trade restrictions and the need of governments to rein in spending to balance budgets is reminiscent of the 1930’s.

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They threaten a period of prolonged global economic stagnation.

The globalization of complex financial relationships, much lauded before the crisis, is now proving a liability in resolving the crisis.

Optimists must rely on Israeli politician Abba Eban’s observation that “History teaches us that men and nations behave wisely once they have exhausted all other alternatives.”

By Satyajit Das

Related by Econotwist’s:

EU’s Bank Rescue Turning Into Political And Economic Catastrophe

QE Expectations Continues To Fuel The Risk Rally

Commodities: Dollar Movements And QE2 Sets The Agenda

Credit Wrap: The Spectre of Mercantilism

A QE Fixation

Japan Struggle To Weaken Yen

The Ultimate Trading Weapon


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