Brave New World

Foreign Exchange Report 26/02/2009

The main story in the FX market has been the consistent weakening of the of the JPY which overnight in Asia breached new lows against the USD of 98.02, its lowest since November 14, in European morning trading. The Japanese currency is headed for its worst month against the USD in 13 years and the worst against the EUR since 2000. The sheer awfulness of the data coming out of the world’s second largest economy has destroyed the JPY’s safe haven status. The trade deficit widened in January to the most in thirty years as exports had slumped  by 46%, according to Ministry of Finance officials. The unemployment rate probably hit 4.6%, its highest since February 2005. Data from the Ministry of Finance shows that Japanese investors have a renewed appetite for foreign bond markets, purchasing JPY 1.23 Trn in the week ending the 19 February, preceded in the last years only by the previous week’s purchase of JPY 1.36 Trn. With a total absence of trust in the competence of the government (the Prime Minister is enjoying 10% approval in the opinion polls) to turn the economy around USDJPY should continue higher, targeting the 200 day moving average of 100.5.

EURUSD has  traded in a 70 pip range in European trading, following a volatile few days. EURUSD, which has generally risen with greater risk appetite in recent weeks, was well supported following news that UBS was to replace its chief executive and the UK was extending bank guarantees on assets. Nevertheless, the currency pair could not break into the 1.2800 level as reminders of the fragility of the eurozone kept risk appetite in check. Economic confidence in the eurozone fell to new 25 year low of 65.4 from 67.2 in January. Meanwhile in Germany unemployment continued to rise, by 40,000, which despite being lower than expected has reinforced the perception of continued economic pain in the region. In today’s FT, EU Monetary Affairs Commissioner Almunia said that the degree of co-ordination should be seriously improved, suggesting that Europe has “sown the seeds of a slow recovery and will lag the US when the recession ends.” On the the subject of co-ordination, disagreement remains over how the EU should proceed when dealing with the PIIGS countries, particularly Spain and Ireland in their deteriorating credit ratings, exploding fiscal deficits and rumours of exit from the single currency. A failure to agree is likely to weigh on the EUR. 

GBPUSD has been well supported at the 1.4100 level for the last few weeks. Having traded as low as 1.4159 overnight Cable crawled back up above the 1.42 handle on news that the UK government is extending its asset protection scheme. Royal Bank of Scotland announced (after reporting a GBP 24.1 Bn loss for the year – the largest in UK corporate history) that it will participate in the government’s scheme and will insure assets worth GBP 325 Bn. The bank will pay a participation fee of GBP 6.5 Bn. The group also announced a sweeping restructuring plan aimed at restoring standalone strength. The BoE’s King, speaking to the Treasury Committee this morning, said that the Treasury has begun a rigorous audit of the nation’s banks. When asked about asset purchases to boost money supply: “We are not going to allow a great inflationary surge. The problem at present is not that the amount of money in the economy is growing too rapidly, threatening an inflationary surge, it’s that the amount of money in the economy is growing too slowly. And that is why we’ve asked the Chancellor for powers to engage in asset purchases in order to increase the amount of money in the economy and I would expect that to happen over the next few months.” The Nationwide Building Society house price survey shows that prices in February fell 17.6% Y/Y (compared to a 16.6% drop in January), making it the largest yearly decline since it began collecting comparable data in 1991.

From the US, Durable Goods orders, New Home Sales and Jobless Claims will be released at 1330 GMT.