SCOREBOARD: Currency turbulence

Confused G7 chatter on Japanese easing set the yen on a roller coaster ride overnight.

A Group of Seven statement caused quite a bit of confusion on the USD-JPY rate last night, as the US dollar shot up to ¥94.41 from ¥93.39 (ie the yen weakened) after the statement was taken to support Japan’s recent efforts on the yen. The actual statement, which comes ahead of the Group of 20 meeting later this week, reaffirmed a commitment to market determined exchange rates, with members stating they would not target their exchange rates.

Given that this is exactly what Japan is doing, it was taken as an informal approval of Japan’s policy. Especially following comments from a US Treasury under secretary stating that "we support the efforts to reinvigorate growth and to end deflation in Japan." The yen shoots higher.

However a G7 official later came out and said that the market had misinterpreted the statement and that in fact the G7 wasn’t happy about Japan’s policy toward the yen – it was in fact worried about it. Then the USD-JPY rate falls (the yen strengthens) and thus the confusion.

Now, we already know that the US had ‘approved’ Japan’s moves to weaken the yen, because Japanese officials told us this and so did that US under secretary. So the US certainly doesn’t have a problem with what Japan is doing. The confusion over the statement reflects the great game of deception.

You see, it seems its okay to weaken your currency, as long as you don’t let people know that that is your intention. Instead it must be seen to be a consequence of other economic policies (this is the US position), such as lowering the unemployment rate, or reflation etc., but it can’t be seen to be the main objective. In this way, the USD-JPY can still be seen to be a ‘market determined’ exchange rate, even though everyone knows that the Japanese government is in fact targeting the yen. In the US instance, that deception was exposed when the Fed Vice Chairman Janet Yellen admitted earlier this week that even if the economic targets the Fed has set to unwind stimulus are met, it may not (ie won’t if she has anything to do with it) actually unwind stimulus. This begs the question that if the stated targets are not the targets, then what are? And would policy makers be so kind as to inform citizens? You know, the little people – the serfs.

Anyway, in forex moves outside of that, we saw the euro shoot up 60 pips or so to 1.3452, while the British pound was little changed at 1.5662, unmoved by data which showed consumer prices fell by 0.5 per cent in January following a 0.5 per cent gain the month prior to be 2.7 per cent higher annually – a figure that remains well above target. The retail price index, which is used more widely by government, is 3.3 per cent higher annually.

For the Australian dollar, the unit shot half a cent higher to 1.0305 – no changes effectively, range trading as it has for over two years now.

For markets elsewhere there was modest risk bid (very modest in the US), with equities around the globe pushing higher and commodities following suit. Financials seemed to be the key outperformer around the globe with banks both sides of the pond getting a decent bid. That helped see European stocks up 0.4 per cent higher on the Dax and 1 per cent higher on the CaC and FTSE100. With about an hour left to trade, Wall Street is underperforming in comparison and tech stocks are in the red, with the Nasdaq off 0.1 per cent. The Dow is otherwise 60 points higher (14,031) and the S&P500 is 0.2 per cent higher (1520).

As for commodities, gold was effectively flat ($1649), copper was up 0.6 per cent while crude was 0.4 per cent higher ($97.43). US rates then pushed higher, with the 10-year yield up 3 bps to 1.6984 per cent; the 5-year at 0.866 per cent; and the 2-year at 0.257 per cent. Aussie futures were off 3-4 ticks with the 3s at 97.19 and the 10s at 96.53.

News otherwise was light – one interesting tidbit is that the US recorded its first January surplus since 2008 of $2.9 billion, compared to a deficit of $27 billion last January, as revenues spiked higher. Otherwise, and still in the US, the NFIB small business optimism index rose slightly to 88.9 from 88.

For our market, the SPI suggests we can expect a modest 0.3 per cent rise for stocks. Then the calendar today shows the major piece of economic news for Australia is Westpac’s consumer confidence survey at 1030 AEDT. The Reserve bank's easing cycle has been a major cause of concern for consumers, exacerbating global fears and just adding to the sense of alarm. For nearly all of 2012, confidence was well below levels seen when the cash rate was 175 bps higher. Thankfully, we’ve seen a modest rebound lately as it has become clear that the concerns nominated by the Reserve Bank to cut rates didn’t eventuate and the pace of cuts eased off. This is obviously very positive, but we’ll see what the future holds – there is still a lot of pessimism in this country. As it stands now, confidence is around average and on paper we should see further improvement, but the battle between perception and reality rages on.

There isn’t much outside of that this morning. We see two Fed speakers – Plosser and Lacker (non-voters) – and then this afternoon some data on US foreclosures and delinquencies. Tonight the big data release will be US retail sales, which are expected to rise 0.1 per cent. Business inventories come out soon after and then we see a speech from another Fed speaker (voter), Bullard.

Hope you have a great day…

Adam Carr is a leading market economist.

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