Sterling and Inflation 13/03/2009
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This doesn’t mean Julius and Gabay are wholly wrong, though. They’re dead right to say that sterling has become riskier. Evidence for this is that the rough pattern of sterling – a slump in the autumn, a weak mini-recovery in January-February and a fall earlier this month – is the same as global share prices. Changes in appetite for risk, as measured by changes in share prices, are accompanied by changes in sterling.
One reason for this might be that, as they say, investors don’t want to put money into economies dependent upon financial services, and stock market moves are a barometer of confidence in financial services.
Another reason is that sterling was buoyed up in the early 00s by carry trades – borrowing yen and Swiss francs to buy higher-yielding currencies like sterling. But the same liquidity crunch that hit shares also forced an unwinding of these trades, with the result that sterling fell and the yen and Swissie soared. The same crunch also caused fears of deep recession which have cut inflation expectations.
For this reason, I share Duncan’s relaxed view of sterling’s fall. It’s a symptom of a global problem, not a UK one.
There’s a simple test of this. If I’m right, then if (and it’s a big if) stock markets continue their recovery of the last few days, sterling too could recover.
It’s if this doesn’t happen that I’ll start worrying a little. “””””
Equity market rally? Wise up 13/03/2009
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The rally witnessed in equity markets this week (with a further rise in the S&P yesterday of 4%) has, rather implausibly, coincided with a number of developments that should give investors cause for concern. The upturn in sentiment has largely been based on a leaked memo(!) sent by Citigroup indicating that the banking group had achieved profitability earlier in January and February, bolstered by a similar statement by Bank of America yesterday. But consider the following negatives that did not exist a week ago:
1. Greater certainty that the G20 meeting will yield nothing substantial- despite conciliatory comments from the White House yesterday, despite comments to appease the markets, there is a growing acceptance that the disagreement between the EU and a growing consensus in the rest of the world is unlikely to be resolved.
2. Substantial measures to deal with economic crisis, the potential for a currency war following yesterday’s decision by the Swiss National Bank to directly intervene in the FX market. The JPY has already been under selling pressure in the last 24 hours in anticipation of BoJ intervention.
3. Comments by the Chinese Premier expressing explicit concern about the credit worthiness of the US. Addressing the end of the annual session of parliament Premier Wen said: “We have lent a massive amount of capital to the United States, and of course we are concerned about the security of our assets. To speak truthfully, I do indeed have some worries. So I hope through you to again call on the United States to maintain its creditworthiness, abide by its commitments and ensure the security of China’s assets.”
The Wrath of Stewart 13/03/2009
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Sensational interview last night with CNBC’s Cramer.
The beginning of a currency war? 12/03/2009
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The rules of the game have suddenly changed. In one fell swoop the Swiss National Bank has introduced by far the most aggressive monetary easing since the crisis began in 2007. In addition to cutting interest rates by the expected 0.25% the SNB announced quantitative measures as well as direct intervention in the FX market to weaken the CHF. Direct intervention, in the form of buying EURCHF, took place at the time of the announcement; pushing the pair up 400pips from 1.48 to 1.52 in a matter of minutes. Prior to today’s announcement the CHF was approaching the record high of 1.43 it set against the EUR in October. The intervention is a direct an effective measure to prevent any further appreciation against the EUR.
It is a pretty significant event and represents a new phase in the economic crisis. The last direct intervention in the FX markets from a major economy was six years ago. Until today central bankers had a tacit agreement in place not to enter into a competitive devaluation race. Even though some European politicians argued that the UK government was talking down sterling, the rate was still determined by the market. The SNB move now paves the way for other countries, particularly those whose economies rely on exports to devalue their currencies. In particular, it could pave the way for the Bank of Japan to address the overvalued JPY and put further pressure on the ECB to add to quantitative easing. Any series of competitive devaluations is likely to boost the dollar. The other big winner is gold, which rose 16% yesterday on the back the news from Switzerland.
Defining the D-word 11/03/2009
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What makes a depression a depression?
Market Commentary 11/03/2009
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EURUSD Upside potential remains while above 1.2730/40, below may see back down to 1.2670/80 initially, key trend line support at 1.2630
GBPUSD Based on down channel base at 1.3660/70, corrective bias higher while above 21 hour SMA at 1.3750, below may see 1.3670/80
Equity markets managed to retain the gains made from yesterday’s massive rally. European indices closed broadly flat. The change in risk appetite, followed an email from Citigroup yesterday saying that the bank had been profitable in January and February. The USD, which has benefitted from the flight to safety as markets have tumbled, experienced a modest weakening throughout most of Wednesday. EURUSD gained about 100pips in European trading, despite yet more disasterous news from Europe. German factory orders slipped a sharp -8.0% in January on the back of a -7.6% decline the prior month. This took the annual rate to -37.9% and the worst since records began in 1992. Nevertheless, the euro has managed to shrug this off as the correlation of higher stocks higher looks to be back in play at least for now. Sterling has continued to keep it’s position against the USD. The currency has benefitted from a re-injection of some market faith in the banking system and a increasingly hopeful views on the effect of quantitative easing. The fact that the Bank of England has continued to target inflation whilst injecting fresh money into the system has reassured some in the market. Still, it is early days and it is unlikely that any last confidence will be demonstrated in the equity markets, or in the FX markets (resulting in a rally in GBP, AUD and CAD) ahead of the slow motion car crash also known as the G20 meeting, in three weeks.
Morning FX Report 10/03/2009
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GBPUSD- Weaker below 1.3900. Targeting 1.3750, then 1.3500
EURUSD- Higher above 1.2700. Targeting 1.2760. Reversal on poor fundamental news, poor equity markets
UK– Economic data from the UK released today reported- you guessed it- a further deterioration in the economic climate. Housing data from the UK continues to break new records. The Royal Institute of Chartered Surveyors (RICS) released this morning showed that monthly price balance had fallen to -78.3 from -76.6. Average sales completed per surveyor sank to 9.5 for the three months to February from 9.8 in the previous survey, the lowest since the RICS started the series in 1978. Retail sales, according to the BRC monitor in February fell 1.8% y/y (compared to a 1.1% rise in January). The Office for National Statistics says that industrial production in January fell 2.6% m/m and 11.4% y/y. Industrial output in the three months to January fell by 7.1% when compared with the previous three months, the biggest fall since March 1974. Commentary- given this latest reminder to the market about the seriousness of the downturn in the UK economy it is perhaps surprising that there was not a consequent sell-off in Sterling. Having seen a 400 pip sell-off yesterday against the USD, Cable found support around the 1.3750 level, rising to a high earlier today of 1.3886. Technically, a rebound was expected at some point. GBPUSD should resume its trend downwards, testing the new support before targeting the 1.3500 level. Interestingly though, some respected FX strategist are predicting that GBP could rise as a result of any positive results of quantitative easing- given that the BOE is ahead of other banks in implementing this measure.
EUR– European economic data showed the worsening business climate in the region. Highlights from the Eurozone include the German trade balance – which rose a weaker than expected 8.5B from 7.3B – and French industrial production – which collapsed -3.1% in Jan to a new record low -13.8% annual rate and considerably weaker than the market expectationm of -1.0% m/m. EURUSD shed about -25 pips in the session thus far and was sitting near 1.2680/90 ahead of the NY open. The relative lack of movement of the Euro from the movement markets, particularly given that is was much worse than expected perhaps says much about market cynicism towards European leaders, who are being wrecklessly overcautious. Chairman of the Eurozone Finance Ministers Junker has demonstrated how behind the curve some policy makers are in the region. Responding to calls from the US- as well as leading economists and a strongly worded piece in yesterday’s FT, courtesy of Martin Wolf, he said, “the 16 finance ministers agreed that recent American appeals insisting Europeans make an added budgetary effort were not to our liking.” In separate comments German Finance Minister Steinbruek said, “We are not debating any additional measures.” However, other policy makers have commented on the need for preemptive and decisive action. ECB Executive Board member Lorenzo Bini Smaghi is quoted as saying in Boersen-Zeitung: “If the (economic) situation worsens, the ECB is ready to reduce rates further, even to zero. That is above all the case if the economy was really threatened by sustained deflation. And in such a situation, the best approach would be to act sooner rather than later.” Like yesterday, EURUSD should follow world equity markets closely. Follow the Dow..
Sterling under renewed pressure 09/03/2009
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As I write Cable has made a strong break through the 1.3900 support level, with little in the way of support for the pair right down to 1.3550. The pair has traded in a 9 pip range in the last 6 weeks, and any significant and lasting break below the 1.39-40 level would chart a new course for the GBP. There is little in the way of event risk but the currency is particularly sensitive to global risk sentiment. Given that most expectations are to the downside, that the global economy may now have reached its darkest hour, little is supporting sterling. The fleeting support GBP was given on Thursday following the BoE’ announcement the introduction of quantitative easing- a monetary tool as yet untried in the UK- and the subsequent sell-off on Friday demonstrates market nervousness over monetary policy in general and the UK government in particular. The announcement over the weekend that the Government is to take a 75% stake in Lloyds TSB, is the latest in along line of hodge podge announcements for the market to digest.
Yen- Further deterioration in safe haven status 09/03/2009
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Nothing appears to bode well for the Japanese economy. Figures released this morning showed that the world’s second largest economy and one of the largest exporting nations has racked up a record current account deficit of JPY 172bn. The JPY has traditionally been seen as a safe haven currency, thanks largely to its trade surplus which often focused minds on the currency’s undervaluation. Related to this was the pressure the currency was under during the “golden” era of the carry trade, just a few short years ago. The JPY’s low yield relative to other currencies in times of global macroeconomic stability and growth, particularly the AUD and NZD meant that retail investors from Japan moved funds out of Japan and institutional investors used it as a funding currency. As sentiment turned, Mrs Watanabe moved her savings back from Auckland to Tokyo and stressed hedge funds needed to square positions and buy yen. That wave of buying pressure on the yen is now over and, in the process, ramped up the price of Japanese exports, which account for a large percentage of GDP, at precisely the time when global demand collapsed in Q4 of last year. The economic picture is severe. The Bank of Japan’s Deputy last week said, “the speed and severity of the decline is something we haven’t experienced in decades.” And this comes from an official who presided over Japan’s “lost decade” in the 1990s. The last few weeks has seen a weakening of the JPY and a loss of its safe haven status. The sense of crisis is not helped by a political system in disarray, with the Prime Minister’s approval rating barely in double figures and the main opposition leader facing corruption charges and refusing to step down. A national election must be called by September.
Key events this week: Tuesday– February CGPI (-1.2 y/y exp) and January machinery orders (-4.5% exp), Wednesday Q4 GDP (12.7% q/a), Friday– Industrial Production
Euro to remain vulnerable 09/03/2009
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The EUR is at a technical and fundamental crossroads. In price action, the currency has taken to congestion that is on the verge of confirming a major bearish reversals against the US dollar, British pound and Japanese yen. The key to future direction will be in fundamentals. The German government has announced a EUR 145bn liquidity fund to help large domestic firms. However, the same level of commitment has yet to be shown to resolving the macroeconomic stresses witnessed in large parts of the European Union. Hungary’s request for a EUR 180bn bailout was rejected by the EU last weekend. At least initially, German Finance Minister Steinbruek rejected any calls to rescue Austria should the Eastern European debt crisis blow-up, given its hue exposure to the region. What to do about the hitherto free wheeling and now withering Spanish and Irish economies has not been addressed. So long as data remains weak, credit spreads widen and- in the case of Eastern Europe- currencies depreciate against the single currency, a lack of concrete mechanism and Europe wide policies will continue to weigh on the EUR ahead of the G20 summit. A failure after that key meeting in a month’s time could well lead to a run on the currency.
Key Events this week: Monday- Euro-area finance ministers meeting, French business confidence. Tuesday- French industrial production, French trade, German consumer prices, German trade and the German current account. Wednesday- German producer prices and factory orders. Thursday– Eurozone producer prices, French employment, French consumer prices and German industrial production. Friday- Eurozone retail sales and German wholesale prices.
Brave New World 