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Central Bankers Stay the Course, Thoughts on the USD/JPY

This week the Central Bankers will take turns giving us their take on the various economic recoveries in Japan, Britain and the US.  Earlier today we heard from the Bank of Japan.  To no one's surprise, they essentially kept the interest rate at zero, but they did up their estimate of the growth rate to 3.3% for the fiscal year ending in March.  Going forward to 2011, they reduced their estimate of the expected growth to 1.6%.

On Wednesday we hear from the Brits, and the US Fed.  The pound has recently gotten a boost from talk of a rate hike this year needed to douse the smoldering inflation.  This mornings shocking reduction in the GDP to a negative 0.5%, well shy of the expected increase of 0.5%, and 0.7% in the previous report should be a sobering experience.  A British rate increase can be ruled out unless there is a strong reversal of economic activity later this year. 

Later in the day  we get the FOMC Statement, and the announcement of the new Federal funds rate.  No change is expected.  On Friday the US advance GDP is released.  It is expected the US GDP is growing at the rate of 3.5%, up from the previous periods 2.6%.

The US, Japan and Britain all have acute budgetary deficits.  The new Conservative-Liberal government in the UK has taken measures to reduce their deficit.  Perhaps today's Public Sector Net Borrowing reduction to £15.8B is the beginning of a trend.  The US, the House of Representatives, where spending bills originate, is now controlled by fiscal conservatives.  It is noteworthy that the response to President Obama's State of the Union Speech will be made by Rep. Paul Ryan the new Chairman of the House Budget Committee.

Because of the twin US deficits, trade and budget, it is easy and very popular to be bearish on the USD.   STRATFOR, a global geopolitical intelligence company, had some interesting comments in their yearly outlook, which may temper some of the bearish USD enthusiasm.  They say:

"The United States will experience moderate to strong growth in 2011. Unlike in other major economies, consumer activity comprises the bulk of the U.S. system — some $10 trillion of the $14 trillion total. That $10 trillion is approximately half of the global consumer market. (The combined BRIC states — Brazil, Russia, India and China — account for less than one-third of that amount). As the U.S. consumer goes, so goes the world. .......But while the United States may be gearing up for a strong performance, the same is not true elsewhere in the world.

In Asia the picture is more familiar. Japan has largely removed itself from the scene. Japan’s population has aged to such a degree that consumption is expected to shrink every year from now on, while its national budget is now majority funded by deficit spending. Luckily for the rest of the world, Japan’s debt is held almost entirely at home, and its economy is the least exposed to the international system of any advanced nation. Japan will rot, but it will rot in seclusion."

Efforts to reduce the deficit have been made in Britain, and will be made in the US.  Yesterday the Japanese reported spending in the new fiscal year beginning in April will be up 2.2%, because of growing welfare and pension costs.  Total Japanese debt exceeds 200% of the GDP, but with 10 year notes yielding only 1.26%, the big budget deficit can be managed.   Going forward the risk is higher rates, as the pensioners cash in their saving to pay for living expenses.

Trade in the USD/JPY has been range bound  recently,confined between 81 and 83.5.  Exporters, the Bank of Japan and the Government all favor a weaker yen.  Large specs are net long about 20k contracts while the small spec is short about 6.5k.  Although this pair can probably traded both ways at the extremes, for the moment we want to buy the USD/JPY in the 82 range.