The inevitable rebound in the Japanese stock market appears to be confined to the region and there are few other signs of lower risk aversion on Wednesday. What appears to be shaping up as a weaker start on Wall Street is accompanied by continued upwards pressure on the Japanese yen as domestic investors reach across the oceans to bring funds back home.
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Japanese yen – The Bank of Japan poured a further ¥5 trillion into domestic money markets to ensure that liquidity remained abundant while aiming to support investor sentiment. The Nikkei 225 index rebounded by 5.7% alleviating one pressure valve and allowing other Asian bourses and local dollar units to breathe easier. However, the relief seems to be minimal with investors picking up bargains following a 17% two-day decline. The yen has strengthened once again in the European session and currently buys ¥80.70 as repatriation flows continue to signal elevated fears. Against the euro the yen is up by around 0.5% at ¥112.45.
Aussie dollar – The relief for Japanese stocks also removed some of the anxiety surrounding the Aussie dollar, which on Tuesday reached a four-month low against both the dollar and yen. The disaster in Japan has significantly dampened enthusiasm for the Australian dollar with the immediate impact on regional economic health the foremost consideration. Since the disaster, money market traders have removed expectations of any further interest rate increase, partly due to contents of minutes released this week by the RBA, but its view is crystalized by turmoil in Japan. The Aussie tracked the rebound in the Nikkei and rose against the dollar to buy 99.23 U.S. cents and also rose to buy ¥80.08. A leading index provided by Westpac using January data dipped by 0.1% following a 0.9% rise the previous month. The index is used to predict activity six months forward, but in today’s market the interpretation of such data is lost.
U.S. Dollar – The FOMC in its statement on Tuesday following the decision to leave interest rates unchanged was a little more upbeat about the prospects for the U.S. economy. The committee noted that despite the significant rise in commodity prices, expectations over inflation remained stable. Meanwhile the risks ahead of inflation falling too low were deemed to be lower than before. Overall the statement appears to support the view that the Fed will live out its second phase of open market bond purchases but won’t feel the need to go any further. The dollar index is higher this morning with gains evident after a rocky start for European units.
Euro – Despite the positive weekend discussions that renewed appetite for the euro, the single currency suffered on Wednesday following a Moody’s downgrade for Portugal that left its credit rating four notches above junk. The ratings agency cites the nation’s challenge in solving its debt crisis as the reason for the downgrade. Moody’s says that GDP is expected to decline this year and the country faces only a modest expansion at beast. For several months now it has become apparent that Portugal will follow the footsteps of Greece and Ireland in needing a bailout. However, it’s also become the popular view that this time the bailout is something of a litmus test for the EU. The unbearably high cost of government borrowing is unsustainable but it seems investors looking for a bailout seem willing to wait until after lawmakers have given one final push towards finding resolution for the stability fund. The euro was weakened by the downgrade today as a reminder that there remain risks from the sovereign crisis. In early New York trading one euro bought $1.3942 having earlier reached $1.4000.
British pound – The negative sentiment towards the euro currency on account of the Portuguese downgrade also weighed on the pound, which recently traded at an unchanged $1.6080 against the dollar. Earlier the currency jumped in response to a sharp dip in jobless claims during February. The claimant count remained steady at 4.5% as jobless claims dropped by 10,200 when investors were primed for a rise in the total. The ILO measure of unemployment in the three months to January rose by a notch to 8% as more public sector workers lost their positions at the end of the fourth quarter. The pound made gains on the surprise number as analysts immediately put the report in the bullish camp. However, inside the report the reading of youth unemployment remains high while the prospect for public sector workers remains dim as government announced cuts don’t kick in until the current quarter. The pound understandably outpaced its continental colleague rising to 86.64 pence per euro.
Canadian dollar –The Canadian dollar faced a wave of selling on Tuesday but it seems that the tone is more favorable by midweek. The unit reached a panic low at $1.0025 a day earlier but continued to recover today to $1.0175. Later on Wednesday the latest manufacturing sales data from January is due to show a jump in activity from 0.4% to 1.0%. While the focus will likely remain on events in Japan, investors in the oil patch are watching ugly developments in Libya where civil war seems to be favoring its enraged leader who earlier in the week won a huge victory against rebels. Crude oil prices continue to rebound this morning as a result, further underpinning the appeal of the loonie.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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