There hasn’t been much news over the past 24 hours and this is reflected in modest currency movements. The strength of the Yen remains a key focus for the market.
Market sentiment has improved from the risk-off mood early in the week. Most equity markets are stronger, with Japan a notable exception. Better sentiment might reflect the circa 5% gain for oil prices on better news for the sector. The EIA reported a fall in crude inventories of 4.9m barrels last week, while Kuwait attempted to keep alive hopes for a production freeze deal, saying a deal could be reached without Iran.
The USD is on the soft side overall, even with a little boost following the March FOMC minutes. Reading the headlines, the minutes highlight a range of views, with some favouring a tightening in April and several against such a move. All in all, the committee seems divided but we know that Yellen is firmly in charge and she remains on the more dovish side, with her comments about “proceeding cautiously” resonating. One can probably expect further dissents over coming meetings.
USD/JPY touched a fresh low of 109.34 this morning. It has become clearer that risk appetite is not a key influence at the moment, with the Yen strengthening, against the improved risk appetite overnight. The market has lost confidence in the BoJ to do anything that would weaken the Yen so it seems to be gravitating towards its longer term anchor. Incidentally, our long-term fair value estimate for USD/JPY based on PPP is 93, highlighting that the Yen remains very cheap in a longer term context.
The AUD has recovered some of the lost ground earlier this week, with AUD/USD edging back up towards the 0.76 handle. The NZD is also slightly stronger, more a reflection of the generalised USD weakness. It has spent much of the last 24 hours in a tight range and has settled at 0.6825.
Of the majors, GBP is at its familiar spot at the bottom of the leaderboard. EUR/GBP temporarily breached the 0.81 mark and GBP/USD almost fell through 1.40, but has since recovered to 1.4125.
Finally, China’s depreciating currency isn’t going unnoticed. The weaker USD is allowing a stronger CNY fix each day but at the same time on the PBoC’s currency basket the currency is actually depreciating. This conflicts with the official line that the PBoC would keep the currency stable on a basket basis. Since the beginning of the year a replica index of China’s currency basket has depreciated by just over 3%, even though the currency is fairly flat against the USD point-to-point.
A weaker Chinese currency represents a risk to other emerging markets and also represents a downward force, albeit mild at this stage, on the Australasian currencies.
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2 Comments
We need to be mindful of the fact that there is plenty of oil and natural l gas on the planet , and if the price ever goes back near $100 per barrel , that oil under the sea , or in the earths fissures or tar sands becomes very viable. it will then be exploited and keep a cap on the price per barrel .
USD/JPY touched a fresh low of 109.34 this morning. It has become clearer that risk appetite is not a key influence at the moment, with the Yen strengthening, against the improved risk appetite overnight. The market has lost confidence in the BoJ to do anything that would weaken the Yen so it seems to be gravitating towards its longer term anchor. Incidentally, our long-term fair value estimate for USD/JPY based on PPP is 93, highlighting that the Yen remains very cheap in a longer term context.
I guess domestic economic exuberance is not a pretext in respect of the forward estimates of Yen strength, but rather financial arbitrage exuberance based off an underlying USD funding strain.
The negative yen basis swap acts like leverage where even yields on the interim “investment” are negative. Any speculator or bank with spare “dollars” could lend them in a yen basis swap meaning an exchange into yen. Because you end up with yen you are forced into some really bad investment choices such as slightly negative 5-year government bonds, but that is just part of the cost of keeping risk on your yen side low. Instead, the real money is made in the basis swap itself since it now trades so highly negative. The very fact of that basis swap spread means a huge premium on spare dollars; which is another way of saying there is a “dollar” shortage. Because of the shortage and its premium, you can swap into yen and invest in negative yielding JGB’s in size and still make out handsomely. There has been, in fact, a rush of foreign “money” into Japan to take advantage of this dollar shortage; the fact that there has been such enthusiasm and it still has not alleviated the imbalance proves scale and intractability. [emphasis added] Read more and more
I guess more for the 1% to deal with while main street continues to shrivel.
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