What Now Abe-san?

Like stones in water
The Nikkei sinks lower yet
What now Abe-san?

Japan continues to lead the market, at least with regards to generating stories about why volatility is increasing.  Another awful night for the Nikkei, down 6.4%, has led to a more than 1% rally in the yen, an increase in yen implied volatility to its highest point in more than 2 years, and a general increase in fear that the world’s central banks may have run out of tools to manage markets as they see fit.  Perhaps it is a good thing if they stop trying to micromanage the global economy and focus only on managing inflation, but I doubt any central banker in existence can do that.

So we have a combination of two key factors driving markets right now; first the Fed and the question of whether they will begin to ‘taper’ their purchases in the near future; and second, Japan and whether PM Abe has the ability to capture control of the Upper House of the Diet and use that increase in political strength to launch the stimulus and efficiency drive he has discussed.  Right now the market is basically clueless on both subjects, although I would contend that most pundits would say both things will happen, eventually.  But in life, timing is everything, and just what the timing of these actions will be is the wildcard.  Think about it, we are discussing the Fed reducing its stimulus at the same time the World Bank (along with every other global institution) is cutting its forecast for global growth.  Last night they lopped another 0.2% from their 2013 forecast, down to 2.2%.  We have seen reductions in forecasts for Chinese growth, Eurozone growth and US growth.  Emerging market economies have seen substantial outflows from both their bond and equity markets and EMG currencies have fallen sharply over the past three weeks.  Is this really the best time for Berdudlen to cut back?

And what about Japan?  Equities there have fallen more than 20% from their recent peak on May 23, which many define as a bear market.  Of course it is a bit ridiculous in my mind to say that a 3-week correction to a 6-month trend is actually a bear market.  It is a correction, one that is both necessary and likely healthy for the longer term prospects for Japanese stocks.  But it is painful.  And you must remember that the FX market is notorious for its extremely short term thinking.  So despite the prospect of things improving significantly after the election on July 21, FX traders are in full-scale panic mode.

Let’s recap currency movements vs. the USD since that Nikkei peak:















Emerging market currencies have suffered, but more against the yen than the dollar.  This remains very much a yen story for now.  The latest data shows that Japanese money managers have been liquidating both foreign bond and equity positions, down a combined $6.4 billion last week.  One of the key drivers in my view of a weaker yen was the likely outflow of Japanese investment.  It can be no surprise that the reduction in that outflow is resulting in a stronger yen.  But the question you need to ask is, will this continue?  I firmly believe that while the current market volatility can be harrowing, the underlying story remains one where Abe and Kuroda will push their agenda more aggressively within months, and that the yen will suffer at that time.  So yen receivables hedgers, don’t miss this opportunity.  The yen is not going back to 88 or even 90, it will find a base in the near future.

As to emerging markets, I continue to believe that current levels offer hedging opportunities for payables hedgers.

Later this morning we will see US Retail Sales (exp 0.4%, 0.3% ex autos) and Initial Claims (346K).  Are they likely to move the FX markets?  I don’t think the market is paying much attention to this data right now.  For this session, equities will be the key driver (SPU’s are down 6 points as I write), but really, I expect to hear some comments from Fed officials soon, as they cannot seem to allow markets to simply trade without imparting their ‘wisdom’.  And we all know that if the stock market rallies irrationally, that is the benefit of Fed wisdom, but if it falls, it is evil short sellers and speculators profiting at your expense!

Good luck

Failures in Greece

That very poor nation called Greece
Continues to shrink, to decrease
Their state asset sales
Have largely been fails
Perhaps they can offer a lease!

Markets are rebounding this morning from yesterday’s poor performance with a bit less fear in the air.  Of course, this only means that market volatility continues to rise overall.  The dollar has fallen against most currencies this morning, led by AUD and NZD, which have recouped yesterday’s losses.  Although why that is the case remains unclear.

In the G3 space, the euro is little changed this morning despite the twin Greek blows of the MSCI dropping the Greek stock market from developed to emerging market status, and the failure of Greece to garner any bids for Depa SA, its national gas monopoly, as part of its asset sale program.  But the FX markets seem to be able to ignore the Greeks for now, or at least drew solace from the fact that IP in the Eurozone overall rose an unexpected 0.4% in May, much better than the expected flat reading.  With equity markets rebounding and bond markets not actually declining this morning, that seems to be enough to encourage euro holders to stand pat.

In the UK we saw a better than expected employment report, with employment rising by 24K, but no change in the Unemployment rate, still at 7.8%.  However, the body of evidence from England continues to show improvement in the economy and the pound continues to benefit, up another 0.5% this morning to 1.5650 or so.  If you recall, this is the level I expected to reach, but am not looking for any further appreciation of note.  I guess the accuracy of that forecast will be determined shortly.

The yen continues to strengthen moderately vs. yesterday’s close, although compared to where it was when I wrote yesterday morning, it is actually a bit weaker.  There was virtually no news from Japan overnight, and the Nikkei, while closing slightly lower, showed less overall volatility than we have been seeing lately.  With no comments from any talking heads, the market has been left to its own devices, which for now means no significant movements.

In the US, we have another marginal data day, with just the Monthly Budget statement (exp -$136.5 Billion) which is rarely, if ever, an FX market mover.  More importantly, the Treasury auctions $21 billion in 10yr notes today (and $13 billion in 30 yrs tomorrow).  The results of this are likely to have the biggest impact on the FX world, but they won’t be known until early this afternoon.  As such, my gut tells me that the FX market is likely to be fairly dull this morning at least.  The caveat here is if we get some comments from Fed or other central bank members.

Right now, all eyes are on the Fed as market participants try to discern whether there will be a change in policy very soon, or just sometime during the rest of the year.  I maintain that no matter how much discussion there is, when the Fed does actually move, volatility will increase, treasuries will sell off sharply and equities will probably sell off aggressively as well.  Is that a story for today?  Almost certainly not.  But it is the background noise that won’t go away, kind of like the Cicada invasion that continues to hum in the background of everyone in the Northeast right now.

Good luck

Hopes and Fears

Amidst hopes and fears
Kuroda remained sanguine
No changes were made

The FX markets are a mixed bag this morning, with the yen reacting to the lack of BOJ activity by rallying sharply, but Aussie and Kiwi having both fallen almost as sharply.

The yen story by now is well-worn, with the market hoping for (although no analysts were expecting) further action by the BOJ to help moderate the recent JGB volatility.  There were calls for increased purchases of ETF’s or a tenor  extension of credit lines that banks use to fund themselves.  However, despite a sixth consecutive month of upgrading their economic assessment, the BOJ made no policy changes.  The Nikkei gave up some of yesterday’s gains and the yen recouped all of yesterday’s losses.  Is this the end for the yen move?  Not the one that calls for a much weaker yen.  At this point, my belief is that there is little desire to do much ahead of the Upper House elections in July, after which PM Abe should command a much more powerful position and will be able to launch his third arrow a bit more accurately.  Until then, I expect that we will see more range games, with 100 remaining hard to breach, but solid support at 94-95.  Longer term, nothing has changed in my view for the yen to trade to, and through, 110, but for now, not so much.  The only caveat to this range trade is the US Treasury market.  If we see 10 year yields start to break out to 2.50% or beyond, which seems feasible to me, I think Japanese investors will start to become more aggressive in their international portfolios, taking advantage of the better yield environment.  And that will lead to a weaker yen regardless of any further BOJ activity.

As to AUD and NZD, I think we can look to their classification as commodity currencies for a rationale as to their declines overnight.  Looking at the screen, pretty much every commodity is lower with the exception of Sugar and Soybeans, both of which are barely higher and neither of which is a critical component of the export baskets for the two nations.  CAD, too, is softer, although not as aggressively, and emerging market currencies, like ZAR and MXN are much weaker.  This price action doesn’t seem to be love for the dollar, rather it appears to delineate a discomfort in holding assets in this space.  What has been the key driver in the strength of these currencies, both EMG and commodity over the past two years?  The hunt for yield!  It has helped that most of these countries were in better fiscal shape, and that most were showing better macroeconomic performance than the US and Europe, but in general, investors were just responding to the combined efforts of the Fed, BOE, ECB and BOJ, who drove interest rates to zero throughout the US, Europe and Japan.  However, recent price action in the interest rate space has been quite a change in these countries.  Bond prices are falling as investors get concerned that 1.5% to 2.0% may not be a sufficient return for 10 years, while short term traders try to prepare for the eventual exit of many of these extraordinary monetary policy measures.  So can we be that surprised that there is a shift from EMG or commodity currencies to the G3?  I think not.  The key to remember with emerging market currencies is that despite improvements in many markets, they do not have the underlying liquidity that is available in the G3.  So when investors are leaving en masse, the movements in these currencies can be quite exaggerated relative to what you might see in the euro or pound or yen.  For those of you who are payables hedgers in this space, we are likely to see some pretty good opportunities going forward.  MXN at 13.50-14.00, or BRL at 2.20, or INR at 59.00 can all be terrific levels to lock in low expense ratios.  And remember, in almost every case the points will be favorable as well.

Finally, looking at the US story today, the data is virtually nil, just Wholesale Inventories (exp 0.2%), and SPU’s are lower by about 1% so pointing to a weak opening.  European bourses have fallen across the board, so it is starting to look like a classic ‘risk-off’ day.  To me, bond prices are the key, giving us the best indicator of market sentiment, so as long as Treasuries continue to soften, look for the dollar to perform well, even against the yen.

Good luck

The IMF Cried

In Europe the fighting’s begun
With Greeks wailing, look what you’ve done
The IMF cried
Don’t blame us we tried
But Greece is just so poorly run

The ECB took great offense
Insisting their rules made much sense
But Europe still trails
As weakness prevails
And no one’s come to their defense

The dollar is rocking this morning, rallying against almost all currencies with some pretty large movements seen.  It looks like the catalyst for this was the revision higher in Japan’s Q1 GDP report, up to an annualized rate of 4.1%.  This has bolstered Abe and his policies, helped the Nikkei rally almost 5% and reinvigorated the idea that Japan may yet escape their morass.  USDJPY is back to 99.00, a rally of ~1.5%, and as you all know, I continue to look for that move to 110 by year end.  We continue to see significant volatility in Japan, but if Q2 growth can follow Q1, I believe that will help mitigate some of this price action.  There is a long way to go before that, however, with the BOJ finishing their meeting this evening, (no policy changes are expected), the Upper House election on July 21, and uncertainty prevailing over what is happening in both Europe and the US.  Receivables hedgers in Japan need to be taking advantage of this correction, for the long run trend remains for a much weaker yen.

In Europe, the biggest story has likely been the IMF’s mea culpa about how it handled the Greek bailout, now recognizing that perhaps their standard prescriptions were not so effective.  I’m sure the Greeks, mired in a 6 year Depression, feel much better about those comments!  To me, the interesting thing is that the Troika is being taken to task for its actions, yet the other two members are unwilling to admit any policy errors.  In fact, Signor Draghi has been adamant that everything the ECB has done has been splendid.  However, Europe is still in the grips of its longest recession since the EU was formed, 6 quarters and counting, and at best, the data remains mixed.  While French IP was a bit better than expected, Italian IP was worse than expected.  There is no consistent growth and thus far, no plans have been proffered that would change things.  While the euro has held up reasonably well overnight, I continue to expect 1.25 before 1.35, with there being no good reason for the euro to rally on its own, and with talk of the Fed ‘taper’ likely to underpin the dollar for now.

So let’s discuss the taper.  The Fed planted a John Hilsenrath article in the WSJ over the weekend to encourage more market discussion on the subject.  What seems to be clear is that the Fed has become somewhat uncomfortable with just how large their balance sheet has become.  The Krugmanesque idea of printing money ad infinitum may be reaching its conclusion.  Certainly the Fed hawks; Plosser, Fisher and Bullard have been consistent in their criticisms, but it is the doves’ comments that lead one to believe there will be action this year.  I have maintained that unless Berdudlen changes their tune, nothing will change, but Dudley seems open to an adjustment before the end of the year, and even Chairman Ben seems to have hinted at that in his last testimony.  If Yellen makes any comments this month about tapering purchases, then I think we will need to re-evaluate the situation, but so far, despite some obvious misgivings on the FOMC, it seems they will continue to sop up $85 billion /  month of paper.  And Treasuries are still falling!

The dollar is benefitting in general from the taper discussion, with only CAD and NOK modestly stronger on the day in the G10 space, and pretty much the entire EMG space weaker vs. the USD.  In fact, we have seen some pretty large moves, with ZAR down more than 2% and INR falling just under 2%, to a record low.  The INR story is one of continued concern over its economic fundamentals, a growing C/A deficit, no budget control and rising inflation hindering the RBI’s room for maneuver to address the macroeconomic problems in country.  ZAR seems to be responding to the consistently weaker commodity prices that we have seen since China released weaker than expected data over the weekend. (Exports were soft, Imports fell and IP was soft).  Concerns over a continued slowing of Chinese growth are going to hit most EMG currencies, so keep that in mind for now.  Longer term, I believe we see a rebound, but the market view for now is bail out and be happy.

With no US data today to drive things, and the week pretty light overall, I expect a modest continuation of USD strength.

Good luck

The Federal Reserve’s Latest Caper

The Federal Reserve’s latest caper
According to every newspaper
Is helping to drive
A stock market dive
Just when will they start the ‘Great Taper’?

Whatever you thought you knew about markets during the past months was wrong.  At least that’s the way it feels as we start today’s session ahead of the employment situation report here in the US.  We have seen a continued increase in the volatility of prices in every asset class, led by the ongoing Japanese equity market gyrations, but encompassing FX, commodity and bond prices as well.  Why is this happening?  I place the blame squarely on the shoulders of 3 men: Ben Bernanke, Mario Draghi and Haruhiko Kuroda.  Each of them has been actively using verbal cues to supplement any actions their central banks have taken.  And they seem to have become enamored of the idea that all they need do is say something and markets will respond as desired.  It was Aesop who taught us about the boy who cried wolf, however, and I fear that these three are starting to learn that lesson; that it’s not good enough to simply promise something.

Yesterday, the ECB did nothing.  Talk of negative rates was pooh-poohed; talk of purchasing ABS was deemed theoretical; and markets have realized that Draghi no longer has the full support of the ECB to do whatever he chooses.  His comments going forward have been devalued and thus “doing whatever it takes” will now require concrete actions rather than grandiose ideas that are never implemented.  Counterintuitively, the euro rallied a bit on this news as despite Draghi’s ineffectiveness, it was actually deemed as a hawkish outcome supporting the currency.  This morning, the European data was better than expected with both German Trade data and IP beating expectations and French Trade data released as expected.  The euro is little changed from yesterday’s close as the market awaits this morning’s US payroll data.

In Japan, the pressure is increasing on Kuroda-san as much of what his policies had achieved continues to be unwound.  Here too, we see a situation where central bank actions have underperformed the expectations that were built up by comments from the central bankers.  There is now a clear split within the BOJ over the idea of incremental policy movements, with a number of members pushing against the idea of doing small things as being too reminiscent of past failures.  They want only big, bold actions.  This is preventing the BOJ from doing anything right now, and that seems to have undermined both the weak yen story and the Japanese growth story.  Thus, the Nikkei has given up 17.6% since its peak three weeks ago, and the yen has recovered almost 8% from that same point.  Since USDJPY broke above 80 for the first time in late October, this is the most significant correction we have seen, and was probably long overdue.  Is this the end of the yen weakness story?  Absolutely not!  In fact, I believe that this should be seen as an excellent opportunity for receivables hedgers to add to their hedges.  Remember, the BOJ is still going to double the money supply over time, it just takes time to actually do it.  My thought is that until the Upper House election occurs on July 21, this consolidation will continue, and perhaps even run further to reach key support at 93.50.  But the weak yen story is not over, simply on hold.

Lastly, that brings us to the US and Berdudlen, the trio overseeing Fed policy right now.  I must have read 15 articles in the past week about how and how much the Fed will ‘taper’ its current asset purchase plan and what impacts it will have.  A Bloomberg survey released overnight has economists looking for tapering to begin anywhere from the July meeting until late 2014 with no consensus at all.  More frighteningly, Berdudlen seems to have either no idea or no concern as to how markets will respond when it eventually does occur.  (I think it’s the former but I fear it’s the latter.)  There are two things which I think are certain, though.  At some point the Fed will slow down and stop its asset purchases, whether gradually or with a great deal of fanfare, and bond yields will rise before that happens as the market will have anticipated the move.  As long as the US economy does not slip back into recession, the taper will be USD positive.  In fact, I think it could be very significantly so.  The USD will go from a funding currency to an investment currency and positioning will need to reverse completely.  That means a lot of dollars will be bought on the FX markets.  While the timing of this remains completely in the dark, it is a virtual certainty to occur at some point.

And not to forget the data today, it’s payroll day.

Here are today’s forecasts:

Non-farm Payrolls


Private Payrolls


Mfg payrolls


Unemployment Rate


Avg Hourly Earnings


The non-farm forecast has fallen since the weak ADP number, and all eyes will be on the participation rate as well, although there is no forecast for that.  Certainly a strong number will accelerate Taper talk, but I fear we are looking at another lost summer of economic malaise in the US.  Housing is the only thing that remains relatively robust.  (Well, that and inflation!) Look for 125K and further slight weakness in the dollar.

Good luck and good weekend

Monetary Cocaine

Said Fisher, a bona fide hawk
Its time for our six-weekly talk
To point out more pain
And stop the ‘cocaine’
That’s causing the sellers to balk

We cannot live in fear that gee whiz, the market is going to be unhappy that we are not giving them more monetary cocaine,” [Fisher] said.  While Dallas Fed President Richard Fisher is not a voter this year, he is certainly the FOMC member with the most colorful descriptions of the current situation.  We already knew that he thought it was time to reign in QE, but this makes clear that he is unconcerned with the market response to those eventual actions.  In fact, if I didn’t know better, I might suspect that he was trying to talk the stock market down!  Of course, he is in a minority on the current Fed, with the key triumvirate of Bernanke, Yellen and Dudley (Berdudlen is my new name for this group but I am open to alternative suggestions) completely convinced that not only is current policy correct, but that they are in complete control and will be able to adjust as necessary if things change.  Implicit in this idea is that when they adjust, everyone will understand and remain calm.  Ultimately, history has shown that the market will NOT remain calm when the Fed changes its tune for real, no matter how much they discuss it now.

But looking at the FX markets this morning we see that the biggest mover, with the most volatility, is the Australian dollar, while the euro, yen and pound have all had relatively dull sessions.  Each of the G3 currencies has traded in a range of only about 0.5%, which implies a volatility of just over 8% annualized, not very high by historical standards nor relative to equities or commodities.   It is this lack of movement that has helped encourage Berdudlen that they are totally in control.  And that is something that has me concerned.

This morning the MPC will announce no change in either rates or the asset purchase program very shortly, and at 7:45 we will hear that the ECB has also left policy on hold.  If you remember last month, there was a lot of talk about the ECB going to negative rates, or buying ABS as a form of QE or looking at other things to help boost the Eurozone economy.  But that talk has faded as the general trend in recent data has been of stabilization and modest improvement, albeit with the entire area still mired in recession.  This morning’s data showed German Factory Orders falling a greater than expected 2.3%, but that will not be enough to prompt Signor Draghi to do more.  The euro continues to hold up well based more on the spate of weak US data (yesterday’s ADP of 135K and Factory Orders of -1.0% are the latest), but as I have written, it is not actually rallying very much.  Trading higher from here will continue to be difficult for the single currency as long as its structural issues remain unaddressed.

The yen story is one of increasing angst by traders and investors as they try to determine the next moves likely by the BOJ.  With Abe’s Third Arrow missing his target, it seems that many investors are falling back into the old mindset of weak growth, deflation and a strong yen.  While there continue to be internal disagreements in the BOJ over the next steps, I am pretty sure that neither Kuroda and the recently appointed members, nor the old guard are keen to see that occur.  As such, I expect that if Japanese equities or USDJPY fall much further, we are going to see a direct response.  Probably buying more risky assets, but something to try to keep their earlier positive momentum alive.

In the UK, I remain confident in my recent description of the situation and my call that the pound will test the 1.56 level, but I see no reason for much beyond that.  This morning, aside from the unchanged MPC, we saw the Halifax House Price Index rise a better than expected 0.4%, just another piece of modestly positive news.  Sir Mervyn King is now gone and we are entering the Mark Carney era of UK central banking.  Remember when it was announced he was taking the role and the markets were anticipating aggressive easing policy?  It seems those views have abated for now.  Keep a close eye on his commentary over the next weeks, as it will all be official going forward.

Finally, what is happening Down Under?  Since April 10, Aussie has fallen almost 11%, dwarfing the declines elsewhere amongst major currencies.  Only the South African rand has had similar movement, but that has been catalyzed by labor unrest locally, and after all, ZAR is a bona fide emerging market currency.  Aussie seems to be suffering for China’s sins; for its own sins; and for the growing perception that the euro is no longer at risk of disintegrating.  And I think the last point is key.  Reserve managers around the world are no longer afraid of diversifying their USD holdings into EUR unconditionally, and so their need to buy AUD has simply disappeared.  I  have always thought that Reserve buying was one of the keys behind Aussie’s excessive strength, and its removal will help normalize the currency.  There is further to go here, with a run below 0.90 on the cards over the next few months.  Remember, the long term historical average of AUDUSD is nearer 0.75 than 1.00.

Good Luck

No William Tell

No William Tell he
Abe’s ‘Third Arrow” misses
The mark by a mile

Shinzo Abe was the major newsmaker last night, giving a speech outlining how his government would be addressing key problems in Japan in order to help achieve his oft-stated goal of 2% inflation alongside firmer GDP growth within two years.  Alas, while the programs he outlined are all positive; deregulating the energy, health and infrastructure sectors amongst others, they are not slated to begin until the Autumn.  This is conveniently after the Upper House elections in July, where an LDP victory is forecast, and which will help him consolidate his power.  But the market is an impatient observer, demanding immediate action if it is to be satisfied.  The outcome was market disappointment leading to further weakness in the Nikkei (-3.8%), strength in the yen (+0.6%) and a small rally in JGB’s.  It seems pretty clear at this point that the Japanese are not going to be able, or at least willing, to do anything else to weaken the yen for the next several months.  Does this mean it will strengthen?  Not necessarily, for remember, there is the US side of the equation.

So let’s look at the US side for a moment.  Today brings ADP employment (exp +165K), as well as Nonfarm Productivity (0.6%), Unit Labor Costs (0.5%), Factory Orders (1.5%) and ISM non-mfg (53.5).  Overall, lots of new information, though the ADP and ISM numbers are the only ones that matter.  And let’s not forget that Friday is the non-farm number.  Now, for the past two years, the pattern has been fairly strong growth in Q1 and Q2, with the employment picture brightening, and then depressing summers where the numbers tailed off and growth flattened through year end.  Today is the first real look at whether 2013 will break away from that pattern.  Remember, two months ago, the payroll data disappointed dramatically, lowering expectations for last month which were met.  Those diminished expectations remain in place as, despite all the talk that over the past 6 months job gains have averaged 200K, economists are looking for a lower number.  The ISM data Monday was very disappointing, and recent US data has been underwhelming as a whole.  Will this picture encourage the Fed to ‘taper’?  I don’t think so, unless we see surprisingly strong data this week.  And right now, the only data that remains consistently strong is the housing recovery.  Everything else seems to be back to a modest growth picture.  Winding up this thought, it seems like we are in for a summer of lackluster growth, no change in Fed policy (although plenty more discussion of the eventual change) and a dollar that remains stable at current levels.  Now that 100 has been breeched on the down-side, my guess is we are going to trade either side of that level for a while.  Figure a 98/102 range for the summer, or at least until the Japanese elections in July.  If the LDP does win a large majority there, that can be the catalyst for the next attempt to break higher in USDJPY, but until then, it will probably be fairly dull.

A brief look at the euro shows continued weak data, with the PMI Services numbers disappointing this morning, and the euro continuing to tread water.  Despite all the spin attempts by EU officials to make things seem like the crisis is over and all is well, the peripheral nations remain in dire straits and continue to drag down the overall Eurozone.  This is why regardless of the US situation, I have trouble seeing the euro rally substantially from current levels.  I maintain we will see 1.25 before 1.35.

Finally, in the UK, things are starting to pick up a bit.  The PMI Services release this morning was a surprising positive, 54.9, much better than the 53.1 expected.  The UK data run this week has been uniformly better than expected and has encouraged a rally in the pound of about 2.5% in the past several sessions.  Today begins the monthly MPC meeting, the last under the guidance of Sir Mervyn King, as next month Mark Carney takes over.  Don’t look for any policy changes here, as further ease would be unseemly given the recent data, but there is certainly no room to tighten yet.  I like the pound to test its April highs of 1.56 this month, but don’t see much beyond that.

Good luck

Where No One’s Eluded the Pain

In Europe, down South, there is Spain
Where no one’s eluded the pain
But now it appears
That after 5 years
Their exports are starting to gain

Yesterday was a bad day for the dollar, falling against almost all currencies whether developed or emerging.  USDJPY fell back below 100 for the first time in nearly a month, although it has reversed course overnight regaining almost all of yesterday’s losses.  The Nikkei clawed back some of its recent losses overnight as well, but what remains notable is the significant increase in volatility in both Japanese equity and bond markets.  Last night we saw what may be the first step toward inflation in Japan with wage growth there rising 0.3% in April, it’s largest increase in a year.  This matters as without higher wages, Abe-nomics is doomed to fail, which would likely result in a very sharp reversal of the past 6 month’s price action in both equities and the yen.  However, I continue to believe that Abe and Kuroda will stay the course and eventually find success… at least in weakening the currency.  The outcome for the Japanese economy seems far less certain.

Yesterday’s PMI data from Europe showed less weakness than had been forecast, but still all readings are below 50.  The euro rallied after the much weaker than expected US ISM data (49.0, exp 51.0) stopped all talk of the Fed tapering any time soon.  This was cemented by the Fed’s Lockhart overnight reiterating that there was no immediate plan to change Fed policy.  And so after a more than 1% rally on that release, the euro has retained most of its gains.  One of the more interesting stories overnight was the focus on Spanish export data, which has grown to a record in the past year (EUR 223 billion) highlighting that changes are being made in the periphery.  The question remains, will they be enough to address the many problems that still bedevil those nations, notably extremely high unemployment.  For now, the market seems to be more focused on the positives than the negatives, and the euro has been the beneficiary of that focus.

I haven’t focused on the commodity currencies in a while, but a brief look at the chart for AUDUSD shows a pretty impressive decline during the past month of more than 8%, although we are a bit more than 1% off those lows as I write.  Last night the RBA left rates on hold, as was widely expected, and retained their easing bias.  It seems that the Aussie’s problems stem from the continued moderation of commodity prices; the seeming end of the investment boom there; and the political situation with PM Gillard seemingly set to lose the election to be held in September.  If you recall, back in January I forecast the Aussie to reach 0.95, and we are awfully close now.  Is there room for a further decline?  Certainly, although my guess is that the recent pace of 8%/month will not be repeated any time soon.  Rather, I expect that the pace of decline will slow substantially, and that an eventual year end near 0.90 is now viable.  That would reflect continued slow growth globally, and continued moderation of commodity prices.  Interestingly, while AUD was tumbling, CAD showed a much more modest decline, just 4% or so, and has actually moved well back away from its recent nadir.  Again, the idea that CAD benefits from the US story, which despite yesterday’s data remains modestly upbeat; while AUD is tightly linked to China, where the story is one of less robust growth, seems to be playing out properly in the markets.  I continue to see room for CAD to trade back toward parity and beyond as the year progresses.

Finally, emerging market currencies are all stronger today, at least compared to last Friday’s levels, although some have had much larger moves than others.  ZAR remains notable for its significant price action where daily trading ranges have been more than 2% for 5 of the past 6 sessions.  One of the things I have learned over my career, is that periods of exceptionally high volatility often define the end of a trend.  If that is true then we must reevaluate all that is ongoing right now.  I will be doing that over the next weeks.  In the meantime, payables hedgers need to be focused on current levels, which still look pretty good in the medium term view.

Good luck

The Summer’s Arrived

For FX the summer’s arrived
And with it the dollar has thrived
The only except
The euro has kept
Some strength since it simply survived

While the calendar doesn’t claim summer for another three weeks, it is clear that the market’s version of summer is upon us.  Price action and trading activity remain relatively muted in the major currencies, although there remains significant volatility in Japanese equity markets, which fell another 3.7% overnight.  All eyes remain on the Fed to see whether QE3 will start to be mitigated, and that continues to be the biggest potential driver of markets for now.  This week we get some data in the US that has the opportunity to move prices, beginning with ISM later this morning and culminating in the employment report on Friday.  We also hear from both the BOE and the ECB about any policy changes, but nothing is expected from either.

Today ISM


Construction Spending


Tuesday Trade Balance

-$41.5 billion

Wednesday Non-farm Productivity


ISM non-mfg


Factory Orders


Thursday MPC rate decision

0.5% (unchanged)

ECB rate decision

0.5% (unchanged)

Initial Claims


Friday Unemployment Rate


Non-farm Payrolls


The euro has performed quite well over the past several weeks despite unimpressive economic data from the Continent and generally improving sentiment in the US.  I think the most likely explanation is that we continue to see a reduction in the existential fears that had permeated the market for so long.  The thing is, much has been made of Signor Draghi’s more recent aggressive action, cutting rates at the last meeting and discussing negative deposit rates, but with a mild uptick in Eurozone data lately, it seems far less likely that he will act further at this point.  This is especially true since Chancellor Merkel has been backing away from much of her earlier determination to see Europe more tightly integrated.  As I have written in the past, the nations of Europe have an inherent conflict in the idea of a shared currency and the desire to remain sovereign nations.  How does a nation retain its sovereignty if it accedes its powers of fiscal, as well as monetary, policy to an outside entity?  That question continues to bedevil the European leadership, and as long as it does, it should prevent the euro from strengthening significantly.  That doesn’t mean we can’t rally a bit in the short term, but unless the Fed completely reverses course and increases the monthly purchase rate of securities, I have to believe the euro will not be able to trade back even to 1.35.   So to me, for receivables hedgers, above 1.30 continues to be an attractive level for hedging.

The story in Japan remains one of greater concern over Abe-nomics and its ability to achieve its desired ends of 2% domestic inflation without destroying the Japanese economy.  It is clear that the early euphoria has ended as evidenced by the Nikkei’s declines over the past 2 weeks.  While equity prices there are still much higher than before Abe’s election, the recent decline has been sobering.  What will the future bring?  In my view this consolidation is a healthy correction of an extraordinary move, and will soon be over.  There is no indication that either Kuroda or Abe are ready to throw in the towel on this effort, and as long as they are printing money, the yen has further to decline.  Will it be a straight line from here?  Of course not.  But my view of 110 USDJPY in December remains on track.  Receivables hedgers, these levels are still quite attractive!

It was interesting reading about Emerging markets this morning as almost every article mimicked my discussion on Friday over the recent sharp declines in these currencies.  Naturally, we have seen many retrace from their worst levels, notably ZAR, which is stronger by more than 1% and MXN, which has at least stabilized.  But BRL has fallen almost 1.5% from Friday’s levels to its weakest point in more than a year, as the central bank there is forced to raise rates to fight higher inflation despite slowing growth.  Overall, the dollar’s broad strength has been most evident versus these currencies rather than the majors of late, but I have a feeling the majors are going to catch up soon.  Much will depend on Friday’s payroll data, and I have a sneaking suspicion we are going to see a strong number, something like 225-240K, which will reignite talk of the end of QE3.  And that, my friends, will result in a much stronger USD against all currencies.

Good luck