Kan a weaker Yen currency policy succeed? Noda lot of hope with the BOJ

It’s about saving face. Going it alone using direct intervention is costly, just ask the SNB. Expect the BOJ to be under pressure from Prime Minister Kan’s public pledges of ‘bold’ actions to further weaken the Yen for the export voting sector of Japanese society. Governor Shirakawa will be pressurized by Finance Minister Noda ‘to ease more and enhance the effectiveness of intervention’. Rather than the expensive unilateral approach of direct intervention, the BOJ will be expected to step up bond purchases, lower the benchmark interest rate to zero and expand a bank-loan program. If Capital Markets get the sense that the BOJ is easing up on the gas pedal, then the demand for Yen will be in vogue again.

The US$ is weaker in the O/N trading session. Currently it is lower against 12 of the 16 most actively traded currencies in a ‘whippy’ trading range.

Forex heatmap

Despite most of the markets attention being focused on the BOJ’s actions yesterday, released data in the US gave us a mixed bag of results. It seems that the US manufacturing led recovery is beginning to lose ‘upside momentum’. The Empire State manufacturing index unexpectedly fell to 4.1 this month, from 7.1 in Aug. Digging deeper, measures of orders, sales and employment all improved, showing the drop in the index was mainly a reflection of a loss of confidence. The Fed’s go-to variable through out this recessionary cycle has been the consumer. Losing their confidence makes it a difficult hill for the Fed to climb. The US manufacturing sector is one of the two categories that has lead this subdued growth (the other being agriculture). Investors will now be witnessing a sectors pace of growth more in line with the rest of the economy. Aug.’s Industrial production rose +0.2% after rising +0.6% in July. Ex-auto’s, Factory output climbed +0.5%, the most in 3-months. This data is strong proof for only modest gains in growth, unlike the ‘explosion’ we saw at the beginning of the year. The cost of imported goods last month increased +0.6%, mostly on the back of ‘oil and food costs jumping’. Finally, Capacity Utilization (the percentage of a plant that is in use), increased to 74.7% vs. 74.6% in July (National average has been north of 80 over the last two decades). Technically, there is enough ‘spare plant equipment and space to prevent bottlenecks that would lead to higher prices’.

The USD$ is lower against the EUR +0.37%, CHF +0.19% and JPY +0.21% and higher against GBP -0.21%. The commodity currencies are weaker this morning, CAD -0.01% and AUD -0.14%. The loonie lost some of its market attention luster as the forex market focused on the BOJ actions and the yen’s move specifically vs. the dollar. The CAD continues to hover close to its 6-week high and similar to all major currencies has appreciated vs. the JPY after the BOJ’s direct intervention in Forex, the first time in 6-years. Fundamentally, the Japanese government is attempting to weaken their domestic currency to appease their export dominated trading sector. Yesterday’s North American data temporarily softened the loonie after weaker-than-forecasted manufacturing data in the US (4.1) and Canada (-0.9%) renewed concerns about their prospective economies. The loonie is receiving ‘three-prong’ support, a less dovish BOC, a currency being used as a proxy for growth and to a lesser extent a safer heaven investment. A higher percentage of speculators seem to have missed most of last weeks ‘move’, the market should expect to witness better buying of Canadian dollars on ‘big dollar’ rallies in the short term.

The AUD is trading within 2-cents of its strongest level in 24-months in the O/N session. This quarter alone the currency has gained +11% vs. the dollar. Similar to other higher yielding growth and commodity sensitive currencies, the trend or value remains upward. The RBA’s Chief economist, Philip Lowe, stated this morning that ‘given that there is currently a relatively limited amount of spare capacity in the economy, the risk of upwards pressure on inflation would be increased if investment and consumption were both to increase very strongly over the next few years’. Investors continue to increase their bets that Governor Stevens will resume raising borrowing costs in the coming months. Futures dealers are pricing in a +60% chance of a +25bp hike by early Dec. Lowe said a key change in the last decade has been the degree to which ‘the Australia’s economy mirrors changes in China’s growth, while the correlation between local GDP and that of the US has fallen’. ‘Clearly what happens in the Australian economy is now more dependent upon what happens in China’. China is Australia’s largest trade partner. Analysts believe that the market is somewhat underestimating the number of chances of further tightening over the next 6-12 months. Not helping the currency will be the forming of a minority government. PM Gillard won the backing of key independent lawmakers this month, allowing her Labor Party to retain government and pursue a ‘tax on mining companies’. Technically, ‘the fiscal outlook looks worse under a minority government and management of an economy growing at +10% in nominal-terms may increasingly rest on the RBA’ (0.9373). No matter, risk takers like the AUD in the short term.

Crude is lower in the O/N session ($75.22 -80c). Yesterday, crude prices pared some of their earlier losses after the release of the neutral weekly EIA report. Inventories came in very much in-line with Capital Markets expectations. The weekly headline print showed that oil inventories fell -2.5m barrels vs. a market expectation of -2.6m, w/w. Stockpiles of gas declined -700k barrels vs. market predictions of a -400k loss, and inventories of distillates (diesel and heating oil) decreased -300k vs. expectations of an -800k retreat. At +357.4m barrels, US crude inventories remain above the upper limit of the average range for this time of year. Crude imports rose +141k barrels to +8.99m bpd and this despite an outage by Enbridge, who provides a pipeline which brings crude directly to the US from Canada. Adding to commodities price pressures is the greenback strengthening over the past few trading sessions. The dollar has rallied sharply vs. the JPY after the BOJ intervened directly to halt the rise of the Yen. Refinery utilization slipped -0.6% to +87.6% of capacity. The market is wary that the underlying situation has not changed, the overall fundamentals remain weak and stockpiles of crude and products remain close to their record highs. Analysts expect speculators to remain better sellers on up-ticks in the short term.

Gold prices took a breather yesterday, a day after recording record new highs, as investors we happy to cash-in some of their profitable trading positions. A stronger performance by the dollar has temporarily dissuaded investors from owning the commodity as a safer heaven asset class. The volatility in the currency market in the past two-trading sessions has led to consolidation in the commodity market. The global ‘fear’ factor currently does not have the momentum to push the commodity into a panic, over-crowded trade situation. The market will now have to wait and see where support comes back in for the commodity before piling again into their ‘one-dimensional’ routine trade position. There is an over whelming consensus that the precious metal remains poised to rally to newer heights, backed by the commodity managing to post yearly gains over the previous nine years. The opportunity costs of holding gold are low due to falling interest rates, by default, the market should expect better buying of the metal on pull backs ($1,271 +280c).

The Nikkei closed at 9,509 down -7. The DAX index in Europe was at 6,255 down -7; the FTSE (UK) currently is 5,547 -10. The early call for the open of key US indices is lower. The US 10-year eased 1bp yesterday (2.70%) and is little changed in the O/N session. For a third consecutive day, the longest stretch since July, US debt prices rose as fundamental data indicates slower growth in the US manufacturing sector. This scenario will always increase the demand for the safety of US government debt. The belly of the curve is well supported as dealers speculate that the BOF will want to buy shorter-term US notes after directly intervening for a weaker domestic currency by selling JPY. Also aiding prices was the Fed buying just under $4b’s worth of product to keep US interest rates low yesterday. The 2’s/10’s curve trades around +221bp. The Treasuries bid is supported by the markets belief that the Fed will announce more purchases of US debt this year and coupled with a softer dollar makes treasuries cheaper for international traders.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell