Has yen weakness gone
Far enough?  Says Amari
I was just kidding!

Remember yesterday, when Japanese Economy Minister Akira Amari said that the yen’s weakness had gone far enough and that there were people who would be hurt by a further decline?  Apparently, he was just kidding.  I guess after those comments hit the tape, he was called into a room and it was explained that the Japanese government doesn’t focus on the currency exchange rate, only on its growth policies and efforts to achieve 2% annual inflation in 2 years time.  When Amari recanted his comments, USDJPY immediately rallied and this morning we are back to just below 103.  As I have maintained consistently, there is more to this story with the yen having much further to go.  The next big resistance is at 103.30-50, but that too will be breached and 110 remains my target for year-end.

The other story of note overnight was the UK inflation data, which was released early this morning much lower than expected.  CPI fell to 2.4%, expected 2.6%; and core CPI fell to 2.0%, exp 2.3%.  (Do you think the Japanese are jealous?) Seriously, though, the pound immediately fell after the release, down 0.6% and back to its lowest level in about 6 weeks.  The key is that with inflation falling and with Mark Carney starting his term on June 1, the idea of an increase in QE has gained much traction in the market.  And remember this, the US story has been more discussion of how and when the Fed is going to withdraw stimulus, so the idea of another wave of QE in the UK is a clear negative for the pound.  If it is to happen, I would expect it will need to wait for the second MPC meeting run by Carney, as he will need to introduce himself at this one.   But the recent UK growth story has seemed to improve, so this is no slam dunk.

The euro is little changed overall, as German PPI data was largely ignored as was a mild upgrade of the German economy by the Bundesbank.  There was no other data released in the Eurozone and I think all eyes are on the next EU meeting this week, although it doesn’t seem likely to have a market impact given its focus on energy and tax policies.

Today has seen broad based, albeit modest, USD strength, with the emerging market currencies fading almost universally, the dollar stronger against the commodity currencies, and commodity prices in general having fallen a bit.  With no US data to look forward to, market players seem content buying dollars on any dips for now.   The broad outlines of market activity are little changed of late, and although we will hear from St Louis Fed president Bullard today, tomorrow Chairman Ben speaks to Congress and that has the potential for a much bigger impact.   So I expect another generally quiet session, with perhaps a bit further USD strength by the end of the day.

Good luck
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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
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A group from the FOMC
Gave speeches to help us to see
They all talked about
Their bond buying doubts
While ending it they could foresee

Clearly the biggest events yesterday were the speeches from regional Fed presidents Lacker, Plosser, Fisher and Williams, who all discussed the ending of the Fed’s $85 billion monthly bond purchases.  While it was no surprise to hear this from the first three, who are confirmed hawks, Williams has been amongst the most dovish members of the Fed since his appointment, and this was really something quite new.  The dollar’s response to this was to shake off the weak data from yesterday (something I clearly didn’t foresee) and end the day stronger, or at least at the top of its recent trading ranges.  And the dollar’s strength continues unabated this morning, trading to new 11 month highs vs. the AUD, and pushing at those same trading range highs vs. the G3 currencies.

I believe the market is currently anticipating QE in the US to continue on toward the end of 2013 if not further.  And in fairness, we have not heard an indication from Bernanke, Yellen or Dudley that they think the time for ending purchases is drawing near, but it is obviously the topic du jour at the Fed.  And the market, rightly in my view, is reevaluating the dollar weakness story on the basis of a premature end to QE.  Will they end it early?  I have my doubts.  After all, they have been quite explicit about achieving 6.5% unemployment before doing so, and despite recent gains there, we remain a long way away from that level.  But the dollar will continue to benefit from these discussions, at least for a while longer.  At some point, the market will expect action, otherwise, it will devalue the Fed speeches on the topic and diminish their ability to communicate their message effectively.

The overnight story was of PM Abe’s ‘Third Arrow’ speech, where he outlined further plans that his government plans to enact or encourage in order to keep Japan’s economy on the right track.  These included fostering private domestic investment of ¥70 Trillion ($687 billion), a 10% increase on this year; tripling infrastructure exports by 2020; and doubling agricultural exports by 2020.  Certainly, all those things would be of great value for the economy and help it on its way toward breaking the deflationary cycle in which it has been mired for more than a decade, but can the government do that?  The first two arrows in Abe’s quiver were government actions, QE and fiscal expansion, and he has delivered as he said he would.  Q1 GDP of 3.5% was proof positive that things were going in the right direction.  But this is a much tougher process for the government to foster, given it is relying on private actors to achieve its stated goals.  I hope he can do it, but it remains to be seen just how effective this part of the strategy will be.  In the meantime, nothing has changed my view of a significantly weaker yen, especially given the prospects for the Fed ending QE sooner than previously expected.  We are still heading to 105 in the summer, 110 by year end and perhaps further than that.  Over time, achieving 125 is not an unreasonable target.

As I mentioned above, AUD continues to fall, as we see medium term holders of the currency unwind positions amidst the ongoing dovishness from the RBA and the modestly softer outlook for Chinese growth.  CAD continues to lag in this process and I expect that this relationship will continue.  Aussie has further to go, CAD less so.

In the emerging markets, we continue to see the story dominated by the USD price action, which means that the dollar keeps rallying against pretty much all of these currencies.  There was precious little to drive things overnight, and movements here have all been quite modest, mostly in the direction of USD strength.  This is likely to be the reality going forward.

Good Luck
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While GDP growth
Has impressed, the ‘Third Arrow’
Is all that remains

The dollar continues to be the primary beneficiary of the current combination of market events and economic releases. While the movement overnight has been relatively limited, there has been precious little retrenchment in the dollar’s recent strength.

Overnight the biggest news was Japan’s Q1 GDP release, with growth of 0.9% (3.5% annualized), the strongest number for any of the G7 nations.  This appears to be a testament to the success of the Abe government’s aggressive actions thus far.   In my view, it is also reason to believe that there will be no changing of the Japanese QE program any time soon.  Coming tomorrow, PM Abe is to announce the ‘Third Arrow’ of his plan, which is to address structural reform and regulatory issues in Japan.  These are going to be critical if Abe-san is going to be able to implement long lasting change in Japan.  However, given the depth of entrenched interests, especially the agricultural community who will likely be very significantly impacted by these changes, it remains to be seen just how much change is in the offing.  As of now, the market continues to believe in the Abe government, and the yen continues to slide in response.  But until the Upper House elections in July, there is unlikely to be any great change in the regulatory framework.  The BOJ will have to continue to carry the load itself, and that means further weakness for the yen.

In Europe, things are less uniformly positive, although early this morning we saw the EU Trade balance expand to €18.7 Billion in March, much larger than expected.  However, the market reaction was pretty unimpressive with the euro actually lower now than when we went home yesterday.  As we have seen over the past several sessions, the dollar remains king in the current market, and I sense that this is simply the dollar’s dominance rather than any specific euro weakness.  That said, given the Eurozone’s extremely weak near-term prospects for growth, I would look for the dollar to continue its ascent going forward.  So receivables hedgers, you need to be nimble for any short term rallies in the single currency.

Politics has been the story in the UK, with more than 100 Tory backbenchers voting against PM Cameron’s proposed economic program as a protest on the EU situation.  There remains a large group of MP’s who are pushing for the UK to exit the EU, although it remains highly controversial.  The thing is, all the uncertainty seems to be weighing on the pound of late, as it slips alongside the euro.  While the growth situation seems to have stabilized, at least, and may be improving more rapidly than previously expected, this issue is likely to be a background weight on the pound until there is some final resolution.  The problem is that may not come for another 4 years and the proposed ‘in or out’ referendum.  My sense is that the pound will underperform most other European currencies for quite a while going forward.  Not collapsing mind you, just lagging.

In the US today we get a plethora of data, mostly at 8:30, led by Initial Claims (exp 330K); Continuing Claims (3000K); Housing Starts (970K); Building Permits (941K) and CPI (-0.3%, core +0.2%); and finally at 10:00 we see Philly Fed (exp 2.0).  So lots more for us to learn about the US economy to see if we remain on the right track.  My thought is we will see better data across the board here, and the dollar will benefit in response.

In Commodity land, the CAD continues to hold on to its relative strength despite a weaker than expected Manufacturing number yesterday and the overall USD strength story.  As I mentioned yesterday, Canada’s proximity and reliance on the US remains a key positive for the currency as long as the US growth picture remains upbeat.  Aussie, meanwhile, continues to suffer from perceptions of slower growth in China and its own central bank’s clearly dovish bias despite fairly robust recent data.  I continue to believe that AUD has further to fall from current levels than CAD.

Finally, in the emerging markets, ZAR has been the big mover, with USDZAR rising 1.3% overnight.  It appears that a combination of general dollar strength, gold weakness and ongoing strife in several mining communities has been sufficient to drive the ZAR to its weakest level in 4 years.  But aside from that move, the space has been fairly quiet, with modest USD strength the underlying theme.

In Europe recession extends
The rate of employment descends
Their policy makers
Those movers and shakers
Cannot stop the current strong trends

It is all dollars, all the time if you are seeking an asset to buy.  The dollar is at its strongest level overall since July, 2010 having made new 4+ year highs against the yen overnight and 6 week highs vs. the euro.  The proximate cause of the euro’s weakness was consistently weaker than expected Eurozone GDP data, with Germany printing at 0.1%, France at -0.2%, Italy at -0.5%, all three lower than expected, and the EZ as a whole at -0.2%.  This makes 6 consecutive quarters of negative growth in the Eurozone, an ignominious new record.  While the market seems convinced that Draghi will act to cut rates again if things get worse, for the time being, the contrast between the US story, where data has seemed to have bottomed, and the European story, where things continue to sink, is quite sharp and the dollar remains the key beneficiary.

In the UK, the employment data was mixed, with a slightly lower claimant count and downtick in the Unemployment rate to 7.8% offset by weaker than expected earnings.  But more importantly, the BOE’s Inflation Report was released, with the Old Lady raising its GDP forecast for Q2 to 0.5%, and lowering its longer term inflation forecast, although with several caveats.  The pound’s response has been to trade somewhat lower, although on the day it has done very little.

Meanwhile, the yen has traded above 102.50 for the first time since October, 2008, and shows no signs of stopping.  Yesterday I expected a bit of consolidation given the strength of the move since breaking through 100, but the market has other ideas.  Overall, nothing has changed in my view that USDJPY will be at 110 come December.  If anything, I am probably being too conservative.  Japanese Consumer Confidence was a bit weaker than expected at 44.5, but the stories that are really getting coverage are those that discuss foreign investment by Japanese companies.  Last night, the focus was on the big Japanese banks, which are suffering because they can’t play the yield curve with the BOJ buying 70% of all JGB’s, and so are forced to find foreign acquisitions of assets to grow.  This is just another facet of the weak yen trade, and one that is likely to increase as time passes.

US data today brings PPI (exp -0.6%, 0.1% core); Empire Manufacturing (4.00); Capacity Utilization (78.3%) and IP (-0.2%).  Given the recent patterns of data, I expect that these numbers are likely to err on the high side, rather than be weak.  The other big story this morning has been the increase in tax revenues in the US.  Tax receipts through April have been almost $100 billion higher than expected, although that was likely the result of capital gains brought forward to 2012 given the impending change in tax rates.  However, for now, the Administration is pushing the numbers hard to show that their plans are working, and the data does look better.  Will it continue?  I guess it depends on how the US economy continues to perform.  Why does it matter?  This is one of the things that will underpin the dollar going forward, proof that the US economy is rebounding, so pay attention to this.

Looking at the commodity currencies, both have also continued to weaken in the face of the USD’s remarkable recent strength.  Aussie has tested key support at 0.9850, which thus far has held, but a break there will encourage a major technical response opening up an opportunity for a move to as low as 0.9350 before its all over.  Receivables hedgers beware!  CAD, on the other hand, has been weakening, but not quite so much as other currencies given its strong ties to the US.  An eventual move to 1.05 seems realistic, but I see limited opportunity for much beyond that.

With all the focus on the majors, the emerging market currencies are not getting much attention.  Frankly, I think that is an appropriate market response.  These will continue to follow the dollar’s overall lead unless something remarkable happens in a given emerging market.  So look for further USD strength here.

According to research by Pew
The nations inside the EU
Are starting to feel
The gist of the deal
Is not beneficial, who knew?

Today’s fight is over the banks
As Spain, France and It’ly close ranks
While Germans maintain
That they will abstain
Support for the others? No thanks

The euro is a bit softer this morning from yesterday’s close as the market reversed early gains in the wake of a much weaker than expected German ZEW Survey (released at 36.4, exp 40.0).  But the headlines in the papers are over the angst that is increasingly visible by the EU nations as they try to reconcile significant differences over how to deal with banking resolutions.  The sides remain the same, with Germany, Austria and the Netherlands insisting that a networked approach where each country deals with its own banking troubles is necessary and anything more than that would require Treaty changes.  Meanwhile, the bulk of the rest of Europe, notably France, Italy and Spain contend that if there is no common banking support agency, with participation by all nations, then it won’t work.  Of course this is the natural outcome given that the latter group is basically telling Germany that because they have the money, they have to pay, and the German’s are simply trying to hang onto their money.  I thought it quite interesting that the results of an annual Pew Research survey showed that belief that the EU has been a benefit to each nation has tumbled to well less than half the population, with some countries, like France down to 41% in favor (Greece is, not surprisingly, at 11% beneficial).  If the core population of the EU is not happy, just how long can they continue to support the single currency?  This is symptomatic of the underlying flaws in the euro that are likely to prevent significant strength any time soon.

As to the rest of the market, it has been a very unexciting day.  There has been little movement in the yen, and no news to drive things.  It seems to be consolidating its recent losses ahead of its next move.  I think 105 is in the cards for June, but for now, 100.50-102.50 is likely to contain us.

The pound is dull as well, with no data of note and only domestic policy discussions about banks and the potential EU referendum to keep business writers busy.

There was an article in the WSJ today about the AUDMXN cross, pointing out that many investors have been shorting AUD against the MXN all year as a proxy bet on the diverging economic outcomes of the US and China.  While early in the year it was certainly a great trade, and it has gained about 9% in value so far this year, my concern is that if the Journal is writing about it, the opportunity may well be ending.  Typically, when a trade idea hits the mainstream media, its run has ended.  While I do still like AUD lower, it is not clear to me that MXN will continue to show the strength as it has to date.

Finally, it seems that my brief discussion of Chinese data yesterday was on the mark, as a number of analysts have reduced their GDP targets for 2013, with the median estimate now 7.8%, down from 8.0% before.  Personally, I think we will have difficulty achieving that, and that the 7.5% level mentioned by Chinese Premier Li is more likely to be the end result.  With that in mind, I expect that we will see a slowdown in what had been a steady appreciation of the CNY as the rest of the year progresses.

Good luck

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In life, there comes often a time
When each man has his chance high to climb
If he passes it by
He’ll always wonder why
But if grabbed it can be so sublime

Well, today’s when the Fates smiled on me
They presented opportunity
I’d be foolish to pass
And so this is, alas
My final note for this payee

Come August I’m back in my seat
At a new bank, seems I can’t leave the Street
But between now and then
I will still use my pen
In my blog and occasional Tweet

Follow me each morning on my blog fxpoetry

https://fxpoetry.com/

or you can follow me on Twitter as well @fx_poet

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

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