March 29,2013

While Cyprus is no longer scary

The question: Was it the canary?

That warned of collapse

Or was it, perhaps,

Just nothing but cause to be wary


On this Good Friday morning, markets are extremely quiet.  Tokyo was open last night but much of the rest of Asia was closed.  Most of Europe is closed as well and it is both a stock and bond market holiday here in the US, although banks and the Federal Government are open.  It should be no surprise that the FX markets are extremely quiet, with very modest movement overall.  The capital controls in Cyprus prevented rioting in the streets, but it seems pretty clear that the level of concern amongst depositors throughout Europe, especially in the periphery, has increased.  Slovenia is the next country in the market’s cross hairs, with serious fiscal issues, a number of banks that failed the ECB’s stress tests and no long history of protecting its citizens against the likely demands of the Troika should things go down that road.  Certainly, if I were a depositor in a Slovenian bank, I would be reconsidering where I was keeping my money.  (Personally, given how difficult it will be to rhyme with Slovenia, I am hoping things there stay out of the limelight).  That said, the euro is marginally higher as we have seen a continuation of position covering into the holiday weekend.  I anticipate that we will see a resumption of the euro’s decline as the new quarter begins, if only because the economic data there continues to be dire.


In Japan last night, data showed inflation (well deflation) was worse than expected, falling to -0.7% in February, and IP actually fell 0.1% rather than the 2.5% rise forecast.  This simply highlights how difficult it will be for the Abe administration to achieve their goals.  The people of Japan have become ingrained with the idea that prices fall amid their stagnant economy.  It leads me to believe that the BOJ, when it meets next week, will be more aggressive than the market is currently expecting.  And that bodes ill for the yen.  I expect that we will retest the highs in USDJPY next week, if not break them after the BOJ announcements.


Remarkably, we have data this morning, with Personal Income up 1.1% and Personal Spending up 0.7%, both much better than expected.  The PCE Deflator was a bit softer than expected at 1.3%, which simply allows the Fed more room to maneuver.  I am finding it harder to believe that inflation is running at 1.3% or even 2.3%, as my observations of spending shows that prices are going up all over the place.  Whether it is the price of lunch, the tolls on the NJ Turnpike, or the cost of clothing, nothing is falling and all are higher than last year by more than 2%.  And when I think about the price of housing, which has been rising at better than 8% for the last year, it is very difficult to accept the governments numbers as an accurate gauge of prices.  I still believe that the Fed will run into its 2.5% inflation limit before we get to 6.5% unemployment, and that is going to change the flavor of markets greatly.  But that is not something to see until the end of this year or early next, so for now, the Fed remains totally in charge.


Commodity currencies continue to gather interest because they remain fiscally stable and offer an alternative to investors who are becoming concerned about the euro again.  Commodity prices, the few that traded, were mixed overnight, but generally we have seen stronger energy and weaker metals prices.  That would argue for CAD to outperform AUD, and I guess we have seen that over the past week.  But overall, this space should remain in good shape compared to the euro, yen and pound for the time being.


Finally, EMG currencies have shown little activity into the holiday weekend.  China fixed at a stronger than expected 6.2689, but there was very little movement elsewhere because of the holidays.  The Korean Peninsula seems to be hotting up a bit, with the North making some more inflammatory statements, but most commentators seem to think it remains directed at the domestic audience there, rather than an actual prelude to war.  I hope they are right.


I will be on vacation next week, but return the morning of April 8.


Have a wonderful holiday and good luck next week