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#Post#: 224--------------------------------------------------
Yen and Dollar-Bloc Sink, while Sterling Ticks Up
By: Marc Chandler Date: November 19, 2014, 5:31 am
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The run on the yen continues. The US dollar and euro are at new
multi-year highs against the yen. The BOJ confirmed its JPY80
trillion monetary base target unexpectedly adopted at the end of
last month. Last month's seemingly last minute decision was
based on a very un-Japanese 5-4 vote. Today, three of the
dissents accepted the fait accompli; one did not (Kiuch).
The dollar is approaching resistance near JPY118, but many
players feel emboldened by recent developments (and momentum)
and are looking for JPY120 in the coming weeks. Despite the talk
of "currency wars" and "race to the bottom" there is little
official push-back. In late-September and early-October, it
seemed that some Japanese officials played down the benefits of
a weaker yen. We suggested at the time that one of the reasons
for the seeming ambivalence was to indicate to the US and others
in the G20 that the yen's depreciation was the result of market
forces and not officials pushing it, as the ECB was pushing the
euro.
With the unexpected contraction in Q3 GDP, there is much talk
about the failure of Abenomics. We demur, and this is an
important interpretative point for investors. If one thinks
Abenomics failed, and that next month's election will result in
a new mandate for Abe, then one would have a very negative
outlook for the world's third largest economy. Instead, if one
recognizes Abenomics as aggressive monetary and fiscal
initiatives, then the sales tax increase was a deviation from
Abenomics. The postponement of next year's planned increase, the
supplemental budget was still expected, and the BOJ's stepped up
monetary efforts suggests Abenomics is getting back on track. In
the five quarters before the sales tax hike, which was approved
on a bipartisan basis by the previous DPJ government, Japan's
economy averaged quarterly growth (at an annualized pace) of
3.25%.
It may be premature to say that the deflation dragon has been
slayed, but even with the contraction in Q3 GDP, Japanese
inflation, adjusted for the sales tax increase, is higher than
most European countries. That said, we have been critical, like
others, that the Third Arrow of Abenomics, structural reforms
have been more elusive than desired. Yet structural reforms were
about boosting Japanese growth potential and increasing returns
not about short-run growth.
Earlier this week, the Reserve Bank of Australia seemed to
suggest that the capital flows out of Japan might help explain
why the Australian dollar is trading rich to fundamentals. That
is not the case today. Indeed the Australian dollar is down
nearly two cents since Monday's high near $0.8800. There are two
triggers that participants are citing. The first is the drop in
iron-ore prices to new five-year lows. We would not emphasize
this because 1) the new free-trade agreement with China will
likely help Australian iron ore exporters, 2) capital flows are
a larger and more important driver for the Australian dollar
than the flow of goods.
The second is RBA Governor Steven intimation that interest rates
are on hold for an extended period--a couple of years. The OIS
market reflects expectations for no hike until at least October
2016. Interest rates on 2-3 year government paper are
essentially at the 2.5% cash rate.
That said, we accept that the New Zealand dollar is more
sensitive to trade flows. The Kiwi capital market is not as
important for global investors, and it is not a reserve currency
as is the Aussie. News of the latest drop in milk prices pulled
the rug from underneath the New Zealand dollar yesterday, which
appeared to have been stalling near $0.8000 in any event, and
there has been additional follow through selling today.
One of this week’s surprises continued today. The Hong
Kong-Shanghai equity link is not being used as much as expected.
The launch on Monday saw the entire quota of Shanghai share
bought or around CNY13 bln. Yesterday, the purchases fell to
CNY4.8bln and today CNY2.6 bln. We are reluctant to read too
much into it, and note that there was much anticipation. This
anticipation had helped lift the Shanghai Composite to a
three-year high exactly a week ago. In addition, there are some
technical issues that still appear to need working out, as the
need to deliver securities before sell orders are placed.
The main news from Europe was the BOE minutes. After last week's
dovish Quarterly Inflation Report and subsequent comments, the
market was anticipated this to be reflected in the minutes. In
fact, the minutes seemed to be somewhat more balanced. Moreover,
Weale and McCafferty persisted with their dissents. These
dissents are unlike the dissents at the Federal Reserve, where
some officials have object to this or that phrase relating to
forward guidance. The dissents on the MPC favor immediate rate
hikes. The minutes have helped underpin sterling, which, up
0.35% on the day, is the strongest of the major currencies.
The US reports October housing starts and permits (little
change, less than 1%, is expected), but the real interest lies
with the FOMC minutes. Given that the FOMC statement was a bit
more hawkish than many expected, with an upgrade in the
assessment of the labor market, many observers are looking for
this tone to be reflected in the minutes.
We are less sanguine. The FOMC statement is the clearest
indication of the views of the Fed’s leadership, which drives
policy. The dot-plots and the FOMC minutes contain a high
noise-to-signal ratio. The importance of the FOMC minutes for
investors is to appreciate the topics discussed from a high
level and the some broad outlines of the evolution of the Fed’
thinking. Ironically, since the statement was seen as hawkish,
and QE ended, we suspect the doves (one dissented) may have
gotten more “air-time”. That said, we caution against attaching
too much significance to the market’s knee-jerk reaction.
Lastly, we note that the TIC data was reported yesterday at the
close of trading. To the extent market participants use this
report; the focus is on the assets that foreign investors are
buying from the US. Given the shape of the US yield curve and
the strength of the dollar in September, it is not surprising
that investors favored long-term US assets. Indeed, off-shore
investors bought $164 bln long-term US securities. However, they
sold $210 bln of short-term assets. This resulted in a net
outflow of $55.6 bln. The August series was revised to $44.8 bln
net inflow rather than $74.5 bln.
This is largely uncontroversial. What is less appreciated is
what American investors were doing in September as the dollar
rallied across the board. American was bought a record amount of
foreign bonds and stocks. Specifically, Americans bought $30 bln
of foreign equities. Before 2000, rarely did thye buy even $10
bln of foreign shares in a month. The previous high was in
October 2008 when Americans bought $21.4 bln of foreign stocks.
Americans bought $40 bln of foreign bonds in September. Only
twice before did they buy even $30 bln of foreign bonds in a
month.
__________________
Marc Chandler
Marc to Market
www.marctomarket.com
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