A 'Yen' For Your Thoughts

by: Dean Popplewell

This Wednesday’s FX news winner has been the Japanese yen. The currency has managed to go "down" in style this morning. It fell to a fresh 32-month low against the dollar and nearly a three-year low against the EUR, following the BoJ Governor Shirakawa’s decision to leave his post a tad earlier than presumed. However, it was probably the implication that he was pushed by the government that drove the yen to establish such an early low.

Governor Shirakawa has indicated that he will step down on March 19, three-weeks earlier than was scheduled. Abe’s government is expected to choose a governor with a dovish tint. This would allow the individual to be more "amenable to the governments plans for aggressive monetary easing to stimulate the Japanese economy." Prime Minister Shinzo Abe is expected to present his candidate for the governorship to the opposition parties after a visit to the U.S. this month.

Japanese Vice-Finance Minister Yamaguchi has so far indicated that the BoJ’s policy tools are sufficient for now, suggesting no quick push for the foreign bond purchases previously suggested by the ruling party. This is certainly an idea that many of Japan's G10 cohorts will not be happy with. Proactively weakening one's own currency could be seen as been too aggressive, a line drawn in the sand ahead of a "currency war."

Not as "hot a topic" is the Spanish and Italian bond yields edging higher in the European session on their open. It seems that investors remain concerned about further political fallout from both of these countries. We are now talking about the political stability of two of the most dominant of the euro-periphery countries, Spain and Italy. This has certainly put the long EUR bulls on high alert again so far this morning.

The dominant question being asked by the market ahead of the ECB meeting on Thursday is whether the current EUR value is too high? The market is certainly hearing from the euro-exports corner, but what can Draghi from the ECB do or say, if anything, to walk the currency value lower? Will he mention the currency directly? When asked about currencies, he usually sticks to the G20 statement. Phrases that frankly indicate that the single unit is too strong most likely will not be used. However, statements on the development of the euro exchange rate and the effects on growth and inflation cannot be excluded. If he wants to push the EUR significantly lower, just mention the Spanish problems and how they make one so nervous. But they are a conservative bunch at the ECB and not the swiftest in making changes. Draghi may say that the current EUR value reflects confidence in the eurozone. This is the region “get out of jail card.”

The KOF Swiss business situation index rose to its highest level in 10-months this morning, with most companies surveyed (6k) reporting a “substantial improvement in their situation.” It seems that companies are content with the 2013 trend thus far, and do not plan to be cutting too many jobs. Even the EUR/CHF (1.24) crate of late has had a minimal impact on business sentiment. Machinery companies plan to boost production and are less likely to cut staff. Unlike the financial industry, who, despite being optimistic, are planning some large global staff cutting (UBS 10k staff).

So far, we have witnessed better than expected PMI levels and rising commodity prices. Combined, both would suggest a “continuing acceleration in global industrial production momentum.” That said, the FX market remains an assortment of peculiar stories rather than a high correlation “risk-on” trade. Under normal circumstances, usually better growth would continue to bolster the EUR, while via higher core-yields, and hurt the JPY. Just like the recent dovish statements from the RBA is hurting the AUD outright despite better global growth. These are some of the 2013 trends that are expected to continue short-term.

Markets are beginning to look overbought again as bullish opinion about the "single unit" has been called into question. Any investor that happened to miss the most recent EUR uptick is expected to sit on the sidelines and patiently wait for another opportunity. The speed at which new cracks are appearing in the eurozone, perhaps this waiting period may not be that long.

U.S. Treasury yields on the rise and a speculative market short on dollars certainly is a combination that should suit the “big dollar” bull. Tomorrow's ECB meet and a Spanish bond auction is beginning to suppress traders' will to take on new positions. EUR leakage to the left hand side cannot be ruled out. Best bet is to witness further consolidation between 1.35-1.36. Larger vanilla options at 1.35, 1.3530 and 1.36 should keep the range-bound interesting!

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