Japanese Yen Recovery Clues Emerge from BIS Annual Report

 

JAPANESE YEN RECOVERY CLUES EMERGE FROM BIS ANNUAL REPORT

The annual report from the BIS warns of broader market turmoil as central bank stimulus is removed. If this occurs, the Japanese Yen is likely to recover.

Talking Points

• BIS Warns of Overreliance on Central Banks, Lack of Pro-Growth Reforms
• Japanese Yen May Recover as Post-FOMC Selling Evolves into Risk Aversion

The 83rd annual report from the Bank of International Settlements (BIS) released over the weekend spoke out against central banks’ “whatever it takes” approach to monetary policy in the aftermath of the global financial crisis, warning the extraordinary accommodation of recent years has bought time for structural reforms but is not a substitute for them. With that in mind, it called on the private sector to hasten balance sheet repairs, on governments to redouble efforts to achieve fiscal sustainability, and on regulators to reform oversight and ensure banks are adequately capitalized.

Perhaps most ominously, the BIS argued that the cost-benefit balance to continuously aggressive monetary stimulus is “inexorably becoming less and less favorable.” In this context, it cautioned that postponing the inevitable exit from the current ultra-accommodative policy regime makes doing so progressively more challenging. The report specifically cited the dangers of an increase in interest rates for public finances in countries where the crutch of “cheap money” has delayed budget reforms, saying a mere 3 percent rise in US Treasury yields across the maturity spectrum could inflict losses of $1 trillion on bondholders (excluding the Fed).

Price action seen last week in the aftermath of the FOMC monetary policy announcement seems to validate the BIS’ concerns. Fed Chairman Ben Bernanke said policymakers can conceivably begin to reduce the size of monthly asset purchases this year, with eye to discontinue them by mid-2014. This sparked a sharp drop in US Treasuries, with the benchmark 10-year yield racing higher to finish the week at a two-year high of 2.58 percent. Broad-based liquidation of positions relying on cheap QE-linked funding likewise prompted selling of European, Australian, Canadian and New Zealand government bonds, boosting yields there as well.

Japanese bond yields mark a notable exception to the jump elsewhere in the major economies, with the 10-year JGB rate holding steady even as others soared. That’s not altogether surprising: the very low-yielding JGBs are unlikely to have been a major beneficiary of QE-driven capital inflows when compared to higher-paying alternatives elsewhere in the G10 space, so post-FOMC liquidation is probably not a significant factor. This may explain the persistence of Japanese Yen weakness both last week and in overnight trade as widening yield gaps encourage carry trade interest. As we discussed last week, this is among the key factors drawing a distinction between the post-FOMC carnage and outright risk aversion.

On balance, the BIS report underscores the danger that the reversal of the “Fed levitation” trade and the forthcoming withdrawal of stimulus in general may translate into a broader-based meltdown in risk sentiment. Indeed, confidence in the continuity of the global recovery may fizzle if the jump in borrowing costs compounds fears of a slowdown in China and lingering recession in the Eurozone. If this produces a true “flight to quality” collapse in risky asset prices, carry trades are likely to crumble as the desire for safety overwhelms yield considerations, sending the Yen higher.

June’s German IFOsurvey of business confidence headlines the economic calendar in European hours. Expectations call for a slight increase in the headline Business Climate index, putting it at three-month high of 105.9. Against a backdrop of worries about the withdrawal of central bank support, an improvement may prove to carry negative implications for risk trends and (somewhat counter-intuitively) weigh on the Euro against USD and JPY as bets on further ECB accommodation are reduced. The single currency may find better support against higher-yielding currencies in the commodity bloc as well as the British Pound.

Asia Session:

GMT	CCY	EVENT	ACT	EXP	PREV
22:45	NZD	Net Migration s.a. (MAY)	1740	-	1600
3:00	NZD	Credit Card Spending s.a. (MoM) (MAY)	-0.6%	-	0.4%
3:00	NZD	Credit Card Spending (YoY) (MAY)	2.4%	-	4.0%

Euro Session:

GMT	CCY	EVENT	EXP/ACT	PREV	IMPACT
8:00	EUR	German IFO - Business Climate (JUN)	105.9	105.7	Medium
8:00	EUR	German IFO - Current Assessment (JUN)	109.6	110.0	Medium
8:00	EUR	German IFO - Expectations (JUN)	102.0	101.6	Medium
8:00	EUR	Italy Consumer Confidence Index (JUN)	86.2	85.9	Low

Critical Levels:

CCY	SUPPORT	RESISTANCE
EURUSD	1.3003	1.3217
GBPUSD	1.5276	1.5510

--- Written by Ilya Spivak, Currency Strategist for Daily Forex

 

 

THE STRONG US DOLLAR DOMINATES THE CURRENCY MARKETS

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The Strong US Dollar Dominates The Currency Markets

 

Equities fell midweek, while the greenback soared and gold tumbled after Federal Reserve Chairman Ben Bernanke said that the central bank could start to scale back stimulus efforts later this year, all but assuring that interest rates will continue their recent moves up from the very low levels of recent years.

The Fed’s policymaking committee released a statement indicating that the economic outlook has brightened since the fall and the job market has shown “further improvement in recent months.” The Fed’s slightly more upbeat language stoked worries that it would start diminishing the $85 billion of Treasuries and mortgage-backed securities it currently buys every month. Those worries were confirmed at a news conference on Wednesday, when Bernanke said it would be “appropriate to moderate the monthly pace of purchases later this year” as long as the economy grew as expected. Despite the markets negative reaction, it can be assumed that Fed has provided more clarity around its exit strategy from current stimulus. Traders continue to believe that the Fed will moderate the pace of its asset purchases later this year and end them around mid-2014, if the economy recovers in line with the Fed’s projections.  

Currency markets reacted as expected after the Fed statements, with the greenback recovering this morning to trade at 82.87 up almost 200 points since trading in the upper 80 price range prior to the FOMC statement. The euro which was trading close to 1.34 ahead of the FOMC is trading at 1.3097 as it continues to tumble on Monday morning as economic, debt and financial problems begin to surface throughout the eurozone with Greece leading the pack. The IMF is threatening to cut off funding to Greece as early as July if the eurozone leaders do not fill a huge gap in funding. The Japanese yen is slowly returning to its previous range hitting 98.71 this morning.

The underperformer remain the Aussie and the kiwi which are trading at record lows against the US dollar, even though the strength of the greenback is putting pressure on the currencies, the lackluster Chinese data last week seems to be the albatross. The AUD and the NZD have continued to decline since the release of HSBC PMI manufacturing data showed a drop in manufacturing, and printed below the all important 50 level which separates expansion and contraction. With the Fed putting the market on notice that it will be weaned from easy money, possibly beginning before long, investors are going to look at the broad picture, which has plenty of warning signs. Economic growth remains spotty, Chinese credit markets are showing stress and interest rates are on the rise.