In the eyes of a currency speculator two days forward represents light-years ahead in the time continuum. With Japan confirming that a G7 conference call would be held 48 hours later on Friday, the green light suddenly sparked a wall of dollar sales in exchange for yen. The Japanese unit went on to rally by 4.5% in the short space of less than half-an-hour as short positions were squeezed out of the market. The yen’s ascent to ¥76.36 marks a post-WWII record high. It appears that there is some contradiction occurring in the market akin to the type of speculation we have become accustomed to watching in crude oil. Everyone is warning that Japanese banks, insurers and corporations will turn importers of capital causing a flood of yen repatriation. But we're short of evidence to substantiate this while speculators are living out that dream.
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Japanese yen – Finance Minister Noda has prepared a 7am Tokyo time meeting of international leaders to brief them on the state of the domestic economy. Given the subsequent capital market dislocation, it is entirely plausible that G7 leaders will agree to stand behind a Bank of Japan initiative to intervene in currency markets to alleviate an unwanted side-effect of the triple-play of catastrophic events still unfolding in Fukushima. Following the surge to a record in early Tokyo trading, the yen fell back equally fast yet despite signs of stability in the equity market although without such signs for radiation levels in Fukushima. In pre-market trading in the U.S., investors are discounting a strong rebound for equities while the yen continues to look menacingly strong at ¥78.48. The speculative element within the market is urging the Bank of Japan to “bring it on.”
Aussie dollar – Risk aversion following the Japan disasters has substantially weakened the Aussie. That much is a typical response under most circumstance. While the yen strengthened against the dollar to a record high, it drove Australia’s dollar back to its weakest since August and before risk-on got underway. However, the catastrophes unfolding for the world’s third largest nation are weighing heavily on the Aussie because of the intricate trade relationship between the two nations. Australia relies on trade with Japan for around 20% of its overall GDP, which last year was equivalent to A$61.7 billion. This is therefore no run-of-the-mill knee-jerk response to a natural disaster, which in part explains why expectations in interest rate markets have shifted by 180 degrees. Since the disaster struck, the money market investors are now looking for the central bank to ease rather than raise interest rates. According to swaps markets there is now a 27% chance of a rate cut at the April RBA meeting. Currency buyers have long flocked to the Aussie dollar on two fronts. First is the successful export story as the nation’s vast natural resources feed the appetite of emerging Asian manufacturers and industry. Second, such strength in export that fuelled both GDP and inflation guaranteed the potential for a widening in the yield premium between the Aussie and the greenback. As this rationale fades in to the background, the Aussie has shed steam. Today it fell to 97.26 U.S. cents as investors trashed the Aussie on the challenges that lay ahead for Japan. Some of those losses were later pared as the greenback responded to the likely rebound in equity prices. The Aussie recently bought 98.29 cents adding one cent from the overnight lows.
U.S. Dollar – The dollar has not fared so well this time around under the safe haven banner and as equity futures rebound, sellers have one more reason to test the downside for the unit. This morning the dollar index is lower by close to 1% as equity futures display double-digit gains. On the data-train this morning investors will learn the latest reading for inflation with an annual pace of 2% expected. Stripping out all of the volatile stuff should leave prices 1% higher than a year ago. Initial claims are expected to maintain downside pressure and could fall by 9,000 from the previous weekly reading of 397,000. Finally the Philly Fed’s index of manufacturing health is due later and is expected to come off the boil declining from 35.9 to 28.8. The dollar index currently stands at 75.95.
Euro – The euro advanced against the dollar as contagion fears subsided following a successful auction of Spanish 10-year bonds. Following weekend negotiations at which lawmakers appeared to make progress towards a lasting solution to dealing with the sovereign debt crisis, more willing buyers showed up at the auction compared to the last event one month ago. Data earlier in the session showed a rebound during January for construction output by 2.1%. In December the series declined by 2.0% according to today's data. Against a weakening dollar the euro extended its gains to a two-week high reaching $1.4052 according to Interactive Brokers data.
British pound – Gains for the pound accelerated on a data-free session to reach $1.6170. Investors looking for monetary tightening out of the Bank of England have recently been beaten back by global events as the central bank tries to spin gold out of flax and create growth at a time when inflation has remained elevated beyond target for almost one year. The euro made gains against the British unit rising to 86.90 pence earlier.
Canadian dollar – The resumption of risk appetite propelled the Canadian dollar higher on Thursday. The unit continues to draw attention on economic fundamentals and, unlike the Aussie dollar, commands a far smaller yield cushion above the U.S. dollar, leaving it less vulnerable to risk aversion woes. At the same time, the Canadian dollar commands more respect at a time of Middle East tensions, which are escalating almost unwatched in Bahrain and Libya. The best barometer here is the price of crude oil, which should break back above $100 per barrel before the day is done. The Canadian dollar rose to buy $1.0125 U.S. cents this morning.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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