The week has been dominated by debates about the propriety of taking monetary action to overtly set a target for currency values. A meeting of the G-7 group proposed monetary policy that weakened the currency was not a problem, as long as the primary goal was the stimulation of your economy. The purpose of this statement was to preempt discussion of the recent effective yen depreciation at the G-20 meeting in Moscow.
The statement had the opposite effect and almost immediately discussion commenced and dissenting views were expressed. The result was confusion in the markets. Fear that the Japanese would be admonished caused buying in the yen, probably short-covering, against the USD and other currencies. With the G-20 meetings continuing through Saturday, traders are cautious. Should the meeting end without specific comments about the establishment of currency targets, selling in the yen will probably emerge.
There is another disagreement emerging at the G-20 meetings. A pact from the 2010 meeting in Toronto stated members would reduce budget deficits. That did not happen, and while European members are campaigning for the renewal of this clause, the big spenders in Washington disagree.
Considering the numbers from Europe, regarding their economic activity, it is confusing why they cling to their austerity model. The European GDP was -0.6 in the fourth quarter, and -0.9 for the full year. Greece, a major recipient of the EU's money, together with specific austerity instructions reported a 6.0% y/y GDP reduction and a 27% unemployment rate. Spain, taking the austerity advise of the EU, has a 26% unemployment rate. The youth unemployment, 15 to 24, rate in Greece is now 61.7%. What is surprising is the lack of demonstrations against the ruling governments. This weeks sell off in the euro has mostly been in response to the poor economic numbers.
The French and the Germans also have a disagreement about the value of the euro. According to The Globe and Mail:
"French President Francois Hollande last week raised the possibility of political interference in exchange rate policy when he called for a medium-term target for the euro's value, a move to counter its recent appreciation.
"I fear a politicization of the exchange rate," ECB policy maker Jens Weidmann, who also heads the German central bank, told Bloomberg in an interview."
Most of the attention in the forex markets seems to have been directed toward Japan, and the disagreements at the G-20 meetings. but there has been some positive news from the U.S. The U.S. Empire Manufacturing Survey showed decided improvement. We also received the Univ. of Michigan Sentiment report which reflected a more optimistic consumer.
The U.S. Net Long Term TIC Flows again shows a heavy inflow of investments into the U.S. Foreign residents increased their long term holding of U.S. securities in December by $76.5B. There were $25.3B foreign purchases of U.S. equities during December, which follows $21.5B purchases in November. The fiscal cliff did not frighten them.
Looking forward to next week, we have the German ZEW Survey of Economic Sentiment report on Tuesday. It is estimated the number will be 35, up from 31.5 last month. When was this survey of 350 institutional investors taken? Before or after the release of the poor economic numbers this week.
On Wednesday in the U.S. we get the U.S. Building Permits, estimated to be 920K, up from 903K last period. At the same time the U.S. PPI, expected to be a positive 0.4%. In the evening we get the Fed's Open Market Committee Meeting Minutes. Will this meeting show comments by Yellen proposing a continued increase in the Fed's balance sheet? In other words, money printing forever.
The data flow continues Thursday and Friday with numbers from both the U.S. and Europe. The weekly chart of the EURUSD (FXE UUP) shows an absence of down side follow through after the previous week's decisive bear move. Does this mean the down side move is over and a retest of the 1.3520 level is the next target?
The weekly chart of the USDCAD (FXC) looks interesting. The CAD had an opportunity to go back to a premium to the USD and failed. Although this is a slow mover, we think it might be headed for the 1.02 handle.
Despite all the hand wringing in the finance ministers community, little damage was done to the bear market in the yen. (USDJPY, FXY) Unless something negative comes from the G-20 the trend is still down, and new lows are likely.