Analysts at Standard & Poor’s ratings agency took the cost of rebuilding the Japanese economy as its opportunity to cut the outlook for its sovereign debt sending the yen into reverse. The cut follows the recent spate of natural disasters and ensuing nuclear power meltdown that earlier spurred record strength for the yen before concerted central bank intervention attempted to alleviate pressure on exporters. Today’s yen decline won’t upset the authorities, although they probably won’t be too impressed with the tone of the downgrade.
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Japanese yen –The Japanese yen was well offered in response to the cut from ‘neutral’ to ‘negative’ with the blame squarely placed on the surging cost of disaster repair. The yen shed more than 1% against the pound, euro and Aussie in European trading while as New York kicks in the yen is lower by 0.8% against the still-beleaguered dollar at ¥82.20. S&P earlier cut Japan’s sovereign debt rating to the fourth highest in January before the economic recovery showed signs of rebounding in light of additional fiscal and monetary stimulus.
U.S. Dollar – The dollar remains lower ahead of the FOMC’s official statement at the all-new time of 12:30 ET Wednesday. The statement will run earlier than its traditional 2:30 pm time to make way for the first-ever press conference hosted by Chairman Bernanke. Many observers expect him to get away with delivering as little as is possible at his inaugural briefing on account that the central bank has around $180 billion in outstanding bond purchases to make before the second phase of its quantitative easing policy is concluded by the end of June. However, it’s hardly too early to discuss post-QE2 policy and the debate amongst policymakers is likely to be lively. It wouldn’t be a surprise if Mr. Bernanke uses today’s media circus to float some views of his colleagues to gauge feedback over the coming weeks. The Fed openly polled market participants about what they would deem to be above or below expectations ahead of the last wave of easing around October-time. The dollar fell to its weakest since December 2009 against the euro as investors remain suspect the FOMC far from wants to cool-off its easy monetary stance.
Euro – The single European currency advanced after German state data showed inflation accelerated during April on rising energy costs and maintaining the view that the ECB will continue to call for higher interest rates. There were a couple of weak spots apparent in alternative data, however. A reading of new industrial orders taken for February rose by less than forecast (+0.9%) lifting the year-on-year gain to 21.3%. German consumer confidence also dipped unexpectedly to an index reading of 5.7 from 5.9. The euro touched its strongest in 16-months at $1.4714 in Asian trading and although remaining higher in the European session has only managed to tread water ever since. Ahead of U.S. durable goods orders for March the euro recently traded at $1.4673.
British pound – The pound rebounded against both its continental counterpart and the greenback after a first-quarter growth rebound that met market forecasts. The 0.5% expansion of Britain’s GDP in the three-months ending in March compares to a contraction of the same amount in the previous period. The boost came from growth across the service sector where a 0.9% change marked the fastest since 2007. The euro eased to 88.58 pence while the pound reached a session high at $1.6581 against the dollar before paring gains.
Canadian dollar – The Canadian dollar has so far failed to cling to earlier strength and is a little weaker against the greenback at $1.0478 U.S. cents. The loonie is caught between a rock-and-a-hard place at present. Voracious risk appetite has lifted global stocks to multi-year peaks as earnings keep rolling in above forecast. That’s typically a boon for higher-yielding currency, which in the case of the Canadian dollar keeps it in the growth-sensitive camp. However, the concern for the economic health of its biggest trading partner means that better investment alternatives are available elsewhere in the world. But as crude oil and metals prices continue to reflect health around the world, the Canadian is largely well-positioned.
Aussie dollar – First-quarter inflation data was a little awkward for the Reserve Bank to swallow in today’s report. The 1.6% pace of increase for the quarter was the highest in five years and leaves the annual pace of increase running at 3.3% after a 2.7% pace through December. Granted, the latest reading might not yet fully reflect the central bank’s full policy restriction having lifted its monetary policy to 4.75%, and at least some of the rise in consumer prices is skewed by a surge in energy costs. Investors bought the Aussie dollar after today’s report assuming that the RBA was more rather than less likely to tighten policy as a result of witnessing inflation burst through the 3% ceiling even temporarily. The Aussie ran to yet another record peak at $1.0852 U.S. cents immediately after the reading and subsequently calmed to $1.0824.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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