What to expect with Yen G7 intervention

The immediate effect of the sharp rise in risk aversion has been to push the JPY and the CHF sharply higher. Markets are now focusing on the growing likelihood of intervention. The G7 will hold a conference call to discuss the yen tomorrow.

What can we expect? The minimum, clear authorization from the G7 members to intervene to stop this yen appreciation on the back of repatriation fears. The market can expect joint intervention to have the biggest affect and send the strongest signal to investors. Direct intervention may not create that major reversal higher for the dollar, but, it will provide a floor and possibly reduce volatility in the currency pair.

The US$ is weaker in the O/N trading session. Currently, it is lower against 13 of the 16 most actively traded currencies in a ‘volatile’ session.

Weaker fundamental data out of the US yesterday has taken a back seat to Japan and the Middle-Eastern concerns. Investors continue to add to their risk aversion trading positions.

Yesterday’s US housing starts posted a sharp decline (+479k vs. +618k), plummeting -22.5% month-over-month. This is again strong proof that the US housing market will be a drag on this quarters GDP. Homebuilders sentiment remains depressed, influenced by excess supply, rising sales of distressed properties and a US labor market that remains vulnerable.

Digging deeper, single units came in at +375k (-11.8%, m/m), while the print for multi units was +96k (-47%, m/m). Year-over-year, starts have declined -20.8% from last Februarys print.

Certainly not helping the housing sector was building permits maintaining their downward trend last month (-8.2%, m/m), with declines reported right across the whole sub-sector.

Other data revealed a headline surge in US PPI, rising +1.6%, the biggest gain in nearly two-years. Digging deeper, the surprise was the aggressive spike in food prices, up +3.9% (largest month-over month increase in 37-years). The market should expect some pass through effect to CPI. Energy prices were not being left behind, rising a sharp +3.3% and the fifth straight month-over-month gain. I wonder what Ben is thinking of inflation now?

The USD is lower against the EUR +0.55%, GBP +0.24%, CHF +0.62% and JPY +0.75%. The commodity currencies are stronger this morning, CAD +0.14% and AUD +0.05%.

The CAD recent moves are oblivious to stronger domestic fundamentals and that includes yesterdays manufacturing sales surprise. The headline print surged +4.5%, m/m, the most in three-years and again should provide strong positive first quarter GDP results.  Strength was recorded across all subcomponents and especially in the transportation sector. In price-adjusted volume terms, gains came in even stronger, up +5.5%, breaking the no-growth trend that persisted throughout much of 2010.
   
With risk aversion trading strategies dominating and investors heading to the sidelines fundamental and technical analysis tends to be thrown out with the bath water. The loonie has been whipped, like growth sensitive currencies, and is eyeing parity outright as investor’s aggressively unwound higher yielding, commodity growth sensitive currencies, as fear becomes infectious across asset classes with hourly Japanese developments.

Close to parity, CAD buying interest is expected to appear again. Logically, there should be a strong demand for the currency because of its fundamentals, however in this ‘fight or flight’ trading environment, logic is mostly ignored. Expect the depth of the backup to be dictated eventually by cross-action. These dollar rallies provide an opportunity to want to own some of the commodity and growth sensitive currency that is supported by stronger fundamentals and a sound fiscal position (0.9887).

Despite being one of the biggest currency losers earlier this week, falling to its lowest level vs. JPY in four months, the AUD has whipped back in the O/N session, but any further gains are a struggle. The currency remains under pressure on fears that its second largest trading partner, Japan, will have a deepening affect on the Australian economy, forcing the RBA to ease rates.

Investors’ expectations for an RBA rate increase have reversed since the March 11 quake and now factor in a possibility of a cut in the overnight cash rate target (+4.75%). Investors are betting there is a 27% chance that Governor Stevens will cut the cash-rate by-25bp at their April 5 meeting. That is up from 22% on Tuesday.

Earlier this week, the RBA minutes were in line with recent official rhetoric and supports markets view that the RBA is likely to sit back and assess the developments in other markets. However, investors are betting that with circumstances continually changing from Japan, risk aversion trading strategies continue to favor JPY and CHF buying, despite the threat of intervention, and the selling of higher yielding commodity currencies.

By day’s end, its all about what happens at the Fukushima nuclear plant and how the G7 members will attempt to calm the markets (0.9859)

Crude is higher in the O/N session ($98.91 +0.93c). Big picture, oil remains under pressure as Japan’s demand loss continues to outweigh Middle-East tensions despite the commodity settling higher yesterday. Technical analysts believe that the commodity has the potential to print $92 in the short term after registering a 29-month high last week.

The turmoil in Bahrain has been providing the market with enough support to withstand the global equities slump and the growing nuclear concerns in Japan. Also providing some support is an IEA report estimating that the outlook for global oil demand this year is little changed, stating that more time is required to determine the impact of Japans earthquakes.

Prices also got a boost from a smaller-than-expected increase in the weekly EIA report. Crude inventories rose +1.7m barrels last week, less than the +2.1m barrels expected. Gas supplies fared no better, declining -4.2m barrels, vs. expectations of a decline of -1.5m. Stocks of distillates (heating oil and diesel) decreased -2.6m vs. a drawdown of +1.4m barrels.

It’s basic economics, supply and demand, Middle-East potential supply constraints being cancelled out by the worlds third largest economy. Japan has closed 29% of their domestic refining capacity. This has affected about +1.3m barrels of the country’s total of +4.52m barrels per day of capacity. With future consumption questionable, demand from the region is expected to remain soft in the short term.

On deeper pull backs the Bahrain situation will eventually dominate. Saudi troops have entered the country, irritating Iran, and are expected to protect ‘vital installations in Bahrain and maintain stability and security’.

Gold has found some traction. The market believes that the recent price plummet was a ‘tad’ overdone. Over the last week the commodity has fallen just under +4%. The commodity’s bull run is not over, and investors are looking to buy the metal on dips as this asset class has been very much a profitable lemming trade this year. These price pullbacks are viewed as favorable opportunities for investors to continue to diversify into safe-haven assets.

Big picture, commodity prices are being supported by geopolitical factors and inflation threats. Even hawkish global rhetoric has managed to support higher commodity prices. Before last week’s unfortunate events, consumer prices were also boosting the demand for the precious metal as a hedge against global inflation. Recent data reveals that Chinese’s inflation has accelerated the most in six years, and UK consumer prices the most in two years. Even US data is showing that their inflation numbers are edging higher. With the commodity being used as a store of value, the asset class is expected to remain better bid on deep pullbacks. The metal has climbed +26% in the past year ($1,396 +0.80c).

The Nikkei closed at 8,963 down-131. The DAX index in Europe was at 6,565 up+51; the FTSE (UK) currently is 5,623 up+26. The early call for the open of key US indices is higher. The US 10-year eased 6bp yesterday (3.23%) and is little changed in the O/N session.

Ten-year notes are pushing yields to their lowest level in a year as risk aversion trading strategies intensified after last weeks Japanese earthquake. Investors are speculating that Japanese insurers will need to sell the longer dated maturities to pay claims for damage. The BOJ is trying to dispel this thought process.

The BOJ efforts to provide more liquidity and expand an asset-purchase program have thus far failed in halting the sale of global equities by risk avers investors. Even the Fed delayed buying back product yesterday as a plunge in yields at the time of the schedule close of the transaction added to volatility. With this risk aversion momentum, ten-year yields are in danger of breaching 3% in the short term.

Japanese investors are the second-largest foreign holders of US debt and own $882b of US Treasuries. The market is expecting them to be a net seller to finance their immediate operations.

Investors can expect geopolitical and event risk in the Middle-East to continue to support FI gains in spite of stronger economic data.

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