There’s a more somber mood brewing midweek with most of the ebullience felt at the start of the week wearing thin. Crude oil prices back at $105 per barrel remind investors that all is not well in North Africa or the increasingly unstable Middle East. The Bank of England warned that sharp increases in fuel costs might sour demand causing a further economic slowdown. News from Japan turned cautious as workers struggle to restore power to the crippled nuclear plants while possibly contaminated food was banned from Tokyo from several prefectures. The Japanese government also gave its first official assessment of the damage and warned that the nature of the disaster coupled with uncertainty of nationwide power restoration means that a sharp rebound in activity is unlikely. Risk appetite feels dull on Wednesday with a further drag on sentiment coming from the Eurozone where it appears political unrest in Portugal means that nation is on the verge of a request for a financial bailout.
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Japanese yen – A three-year old toddler could probably throw a ball further than the range exhibited by the yen in the aftermath of coordinated G7 intervention. If the Bank of Japan’s intention was to iron out excessive volatility of currency movements it probably deserves a five-star rating coupled with a commendation. I don’t remember the last time the yen traded for three days within a range of just ¥0.6, which is precisely what it has done since Monday. The dollar/yen rate has the capacity to trade that range in an hour and to see it incapacitated like this is painful for traders. The government said it may introduce a restructuring agency to coordinate efforts to rebuild the economy and said that the damage caused may reach ¥25 trillion ($309 billion). It also warned that a sharp rebound might not be on the agenda given the power outages likely to take time to repair. It estimates that the damage will reduce national gross domestic product by 0.5% in the fiscal year starting April 1. The yen held steady at ¥81.00 hugging the horizontal unchanged line as it has for three days. Against the euro the yen gained to ¥114.46.
British pound – Minutes from the Bank of England’s March meeting revealed a desire to “wait and see” how inflationary energy costs flow through the economy. Bank officials have adopted this attitude vocally recently claiming that there are copious amounts of spare capacity that would prevent price pressures from spiraling. With 330,000 public sector job cuts underway as part of a national austerity drive, the Bank has been cautious in its outlook for growth and correctly assumes that it wouldn’t take much to tip the economy back into recession at a time when the latest set of readings underwhelmed economists. The pound fell sharply against the dollar as bulls were greatly disappointed that the balance of power had not shifted despite a pick-up in inflationary pressures. The minutes revealed that the committee saw fewer risks in waiting to see how surging energy costs developed and added the new threat that a negative impact on demand and already hangdog consumer sentiment might trip growth up. Hardly rate-rising material. The pound slumped to $1.6250 from a 12-month high at $1.6400 on Tuesday. Against the euro the pound eased to 87 pence.