Investors are falling over each other desperate to sell assets and hold cash and bonds on this infamous anniversary of the death of Julius Caesar. He was warned ahead of time by a seer to “beware the ides of March.” Investors have been slow to respond to the Japanese crisis but have stepped up reaction as the situation becomes grave at Fukushima Dai-Ichi power plant within 140 miles of Tokyo. On his way to the theater in Pompey that day Emperor Caesar met the seer and noted with gladness that indeed the ides of March had come and he was still alive. “Ay, they have come. But they have not gone.” Of course Caesar was murdered later that day. The earthquake and tsunami disaster in Japan is sinking stocks and creating demand for bonds and currency havens. Among them is the Japanese yen, although most are in agreement that its buoyancy looks most odd and won’t last.
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Japanese yen – The yen continues to rise albeit gently versus the dollar, while it has made stronger gains on the crosses against riskier currency partners such as the Aussie dollar. The growing fallout is belittling a second day of efforts by the Bank of Japan to soothe investors’ nerves by flooding the domestic money with liquidity in an effort to restore calm. And while the loss of lives resulting from the tsunami continues to grow, the situation is deepened by the struggle to contain over heating at Tokyo Electric Power’s Fukushima Dai-Ichi nuclear power plant. Four of the six nuclear reactors have failed after cooling systems failed prompting further evacuations of nearby residents. Others have been warned to seal their homes with tape to prevent against exposure to rising levels of radiation. Stocks fell harder on day two of the week bringing the cumulative drop to 17%. As Japanese investors liquidated overseas holdings and repatriated funds, the yen remained buoyant although few expect the response to last. Japan will have to raise an enormous amount of money to rebuild and will inevitably look to the international community for assistance in doing so. The rebuilding of Japan will be painful although positive from an economic perspective and a resulting expansion will likely weigh on the yen in the medium-term. The dollar currently buys ¥81.11.
U.S. Dollar – Tuesday’s fears over Japan have reversed the fortunes for the dollar index, which is benefitting today from a flight to quality. Few expect any change from the FOMC this afternoon although ahead of the drama in Asia many had expected the central bank to point out salient signs of recovery for the broad economy and the labor market. Ahead of today’s meeting, a survey of manufacturing activity in the New York region is expected to reveal the strongest level of activity in nine months. The dollar gained 0.6% as buyers bid it up having ditched commodities and equities falling under the strain on risk appetite emanating from Japan, whose equity market suffered its worst two-day decline since 1987.
Euro – Positive discussions over the weekend propelled the euro back above $1.4000 on Monday while a surge in fear over global growth on Tuesday reversed its course sending it back to $1.3856. An EU-wide survey of economic sentiment from ZEW showed confidence at a 10-month high limiting the decline in the single currency. However, the same survey of German businesses showed a shortfall in the current index of optimism while the forward-looking sentiment faced an outright drop. Germany has been at the helm of the current economic expansion. The euro slid to a two-week low versus the yen at ¥112.25.
British pound – The pound was roughed-up on Tuesday and returned to lows witnessed in response to the Japanese earthquake, falling today to $1.5978. An index of house values for January, although a little dated, weighed on the pound and was well adrift of forecasts. The index rose by 0.5% rather than gaining by the predicted 2.3%. In December the index showed home prices rose by 3.8%. Today’s report once again raises concern over the health of housing, but really shouldn’t surprise. The pound continued to decline against the euro to 86.73 pence per euro while against the Japanese unit the pound fell 2% to ¥129.26.
Aussie dollar – The Aussie slid against the Japanese unit as stocks in the region cratered. The MSCI Asia Pacific index dropped by 5.1% and weakened the theory of buying emerging and higher-yielding currencies. The Aussie dropped to its lowest in three months at ¥112.27. Adding to the unit’s woes was the RBA’s minutes from its February meeting at which the central bank welcomed a rise in household debt-servicing requirements following an increase in borrowing. Such restraint offset increasing investment in mining. Combined with the threat to Asian growth, the Bank’s increasing resistance to further tightening in monetary policy weighed heavily on the Australian dollar, which slid to 98.12 U.S. cents and its weakest since mid-December.
Canadian dollar –The Canadian dollar faced a similarly challenging environment as the U.S. dollar made accelerated gains, crimping commodity prices in response to threats to global growth. The Canadian made a beeline for parity falling to $1.0025 having closed on Monday at $1.0260.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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