Brave New World

Currency Review 14/05/2009

News

USD: Producer Price Index for March was up 0.3% versus the 0.1% consensus forecast

USD: Initial jobless claims for the week ending May 2nd was 637k, versus the 610k consensus forecast

Overview

European equity markets closed fractionally up after a day which saw them in mostly negative territory. Lackluster price action has been the dominant them in the foreign exchange markets as little in the way of data has provided momentum. However, initial jobless claims data, which came in worse than expected has helped strengthen the argument that talk of green shoots of recovery is premature. The poor US retail sales data for April was a useful reminder to the exuberant equity markets that there is still no actual recovery taking place. Other concerns about economic growth yesterday came from China, which showed a slowdown in industrial growth and production of electricity in April; raising uncertainty over whether a Chinese recovery is taking place. Similarly,  yesterday’s UK Bank of England quarterly inflation report, gave a surprisingly dovish assessment about the state of the economy. The BOE warned that the lack of lending ability could seriously hamper any recovery of the economy. Mervyn King expressed great uncertainty about the future direction of the UK economy, saying “Judging the balance of influences at the moment is extraordinarily difficult”.  Meanwhile, in the Eurozone industrial production data yesterday showed a 20.2% drop in the year to March, the steepest year on year fall since records began in 1991.

The correction taking place in investor confidence has had little impact on the currency markets, although the USD has regained some of the ground it lost to many of the major currencies. Momentum against the dollar has, for the time being, been halted. The exception to this is the JPY, which has strengthened significantly in the last few days. USDJPY tested a low of 95.10 earlier, the 100 day SMA and yesterday’s low. A breach below would see the currency pair targeting the March low of 93.50. Bank of New York Mellon attribute the JPY’s recent rise to three factors. First, a declining interest by Japanese investors in foreign bonds, as a collapse in yields around the world has made domestic markets relatively more attractive. Second, about a third of Japan’s exports go to China, Korea, Taiwan an Hong Kong; the economy should benefit from a pick up in economic activity in China. Third, the allocation of the JPY in the portfolio of FX managers which has until now been low should rise due to the disappearance in yield differentials- being underweight the yen is less rational than it once was.