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Yen Bounce Featured in Consolidative Session
Most of the major currencies are consolidating within yesterday's trading ranges. The main feature has been comments from Japan's Minister of Economic Revival that appeared to declare victory in the government's attempt to weaken the yen. News wires quoted him saying that the yen had corrected its excessive rise and was currently in line with fundamentals.
This triggered a wave of short covering yen positions, driving the down form around JPY89.60 to near JPY88.60 in initial reaction that lasted about an hour. It has been consolidating since, mostly below JPY88.90. The sharp recovery of the yen was also felt on the crosses, though a more consolidative tone that was seen in the European morning was fading and the currencies moved back toward the lows as North American traders prepared to return to their screens.
The yen has weakened about 6.5% since the Japanese election was called that led to the LDP victory and the return of Abe, on promises of monetary and fiscal stimulus for an economy slipping into its third recession in four years. There was surprising little reaction from Japan's trading partners from its effort to talk the yen down. That said, Bank of Korea Governor Soo said yesterday it may have to take action to counter the impact of the weak yen on Korean exports and last week, in an unusual reference to the foreign exchange market a regional Fed president (Bullard) said he was " a little disturbed" by the yen.
It appears that Japanese officials had signaled that they were not looking for a large move or a persistent decline. The JPY90 level for the dollar was often cited as upper end of what they desired. Today's comments by Minister Amari seems to be an attempt to blow air in the yen's parachute to help assure a soft landing. Separately, the BOJ's quarterly report cut its assessment of 8 of 9 regions. This is consistent with new easing and even doubling its inflation goal at next week's meeting.
In terms of economic data, there were two features in the European morning. UK inflation was in line with expectations with CPI rising 0.5% for a 2.7% year-over-year increase. Input producer prices rose a 0.2%, a little more than expected , while output prices slipped 0.1%, whereas the consensus called for unchanged. This should be watched as it may be revealing information about profit margins. Separately, it was reported that the German economy expanded 0.7% last year, which points to a 0.5% contraction in Q4. There are other reports suggesting that the German government is preparing to slash this year's growth forecast.
There is another talking point today. A German paper is reporting that as soon as tomorrow the German government may announce a redeployment of its gold reserves, which currently mostly held by other central banks, including the Federal Reserve (45%), UK (13%), and France (11%). The report suggests some of the gold will be repatriated from the US and all of its holdings from France will return to Germany. Some observers are claiming this is a sign of underlying mistrust.
This seems to assume what ought to proved. If Germany were to sell some of its Treasury holdings, with the same value of the gold, it would not raise questions. Given the extent of the integration of Germany and France, the repatriation of German gold from France is hardly even a rounding error in the relationship.
Separately, an interesting story in the precious metals today is that price of platinum has moved above the price of gold for the first time since last March. Apparently, a key factor here is shrinking supply from South Africa, which is by the far the world's largest producer.
In the US today, there is full slate of economic reports. The retail sales report would generally be among the features, but given that the payroll savings tax just increased to 2%, the data in the Dec reading is dated, though consumption appears to have held up going into the fiscal cliff. The Empire survey is for the month of January and thus more current. An improvement from the -8.1 reading in December is widely expected. Producer prices are often just of passing interest to the capital markets. Business inventories, the last economic report, will help economists finalize Q4 GDP estimates.
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Orly, I think the market has been trading on ideas that next weekthe BOJ wil double its inflation goal and provide more QE. When it has recently increased its asset purchases, it seems to do so in JPY10 trillion or so clips. The Abe govt has indicated it will use reserves to buy ESM paper. It is not clear whether this will be out of its euro holdings (say switching from French or Greman bonds) or US Treasury holdings.
The market has been willing to run on words, or at least certain people's words. Just as Draghi's OMT scheme has not been deployed, it is not clear besides fiscal and monetary what else the gov't will do.
My concern is that what drives the yen higher is its inability to recycle its capital surplus. This is composed of its usual current account surplus AND the foreign capital inflows.
Hope this helps your own thinking. Good luck.
I appreciate the response. :D
"My concern is that what drives the yen higher is its inability to recycle its capital surplus."
Do you mean that it will fail to be able to move the yen lower because it is out of ammo?
Ironically, wouldn't that mean that this next leg down for the yen may not be because of talk or asset purchases or conversion of one debt to another but will be due to the actual failing of the Japanese economy?
:O
What effect would an announcement of double the goal of inflation have on the yen? Seems that I can say anything I want but how would the market react to a doubling of talk?
Also, what is the word on the half-Trillion dollars worth of foreign bond buys that may be announced at the BoJ meeting? Heard anything else about that? It flashed across the screen and then was heard no more.
:D