Pain in its Wake

A weakening yen
May yet draw pain in its wake
So Amari says

The yen continues to be the story driving the FX markets on a daily basis, with last night being no exception.  In what had been a very quiet market, Japan’s Economy Minister, Akira Amari, said, “People say the excessively strong yen has corrected quite a bit. If the yen continues to weaken steadily from here, negative effects on people’s lives will emerge.”  Once this hit the tape, it was a steady yen rally against all currencies, with the move approaching 0.6% from Friday’s closing levels as I write.  At the same time, the Abe government upgraded its assessment of the Japanese economy for the first time in several months as more and more people are willing to believe that the PM is on the right track.  Is he?  That remains to be seen, but it is clear that the first part of his plan, massive QE and Fiscal stimulus, has been initiated and is seen as positive.  Addressing Japan’s structural issues continues to be a major concern, but perhaps after the election in July, that will be viable.  Until then, I expect that the yen will continue its weakening trend.

In Europe there has been very little new news to drive market activity.  There was some second tier data from Italy, showing weak Industrial Sales, but strong Industrial Orders, and perhaps more importantly, a current account surplus in March.  But the market didn’t care.  Overall the euro is little changed to slightly higher as the market seeks the next piece of news.  There is an EU summit this week in Brussels, but the focus seems to be on tax policy and energy policy, neither of which is likely to drive the currency markets.

In the US, data this week teaches us more about the housing market with both Existing and New Home sales to be released.  We also get Durable Goods on Friday, but the FOMC minutes are released Wednesday afternoon, and unless we get some tape bombs by Fed officials, that is likely to be the most interesting thing happening this week.  As next Monday is Memorial Day, the market is already getting into its summer mood, with less activity in store.

In the emerging markets, currencies are generally stronger across the board, which is in keeping with the dollar’s overall soft tone triggered by the Amari comments.  Interestingly, we are seeing both Gold and Silver weaker, which would generally be seen in a strong dollar environment, but today is running against form.  However, if you look at the recent underlying trends, with the dollar stronger over the past month and commodities weaker, today is simply an outlier.  My feeling is that the dollar will soon regain its strength and bring both markets back into synch.

Overall, it is not shaping up to be too exciting today, nor in fact, this week, so keep your eyes peeled for stray comments by officials as they may be the key drivers of the next move.

Good luck