Today’s FX View from IB:
Ongoing speculation that profits earned overseas by Japanese companies is finding its way home before the fiscal year-end is lifting the yen on Tuesday. At the same time Asian stocks are commemorating the one-year anniversary of the lowest closing point of the bear market for stocks with a down day, also providing a knee-jerk bid to the Japanese yen. Other Pacific region data suggests, however, that risk appetite is likely to remain on the agenda and may provide the Australians with another reason to lift rates. But the main story today surrounds the British pound where the bad news just keeps piling up.
British pound – Comments from two ratings agencies helped keep the pressure on the pound today while warmer words from one of the MPC members helped stem some of the pessimism. Kate Barker addressing an NIESR audience said that recent data provided grounds for optimism that the British recovery was “broadly on track” and pointed to the gradual disappearance of several of the negative factors holding back the recovery. While admitting that the economy still looks fragile Ms. Barker noted that the downside risks to growth had diminished leaving a still bumpy road ahead.
Speaking on a day when data proved a further weakening of the U.K. trade deficit for January on account of lower chemical and commodity sales, Ms. Barker said that the British economy was failing to feel the potential impetus from weaker sterling. She noted that the British economy was faring no better than either German or French manufacturers presented with the onset of recovery. Her fear is for significant ongoing weakness in Britain’s trading partners that would prevent any benefit from a cheaper pound.
Meanwhile the pound fell against the dollar to $1.4971 and above last week’s 10-month low after Fitch Ratings agency advised that the government needs to accelerate its plans to reduce the budget deficit. Reflecting momentarily on that prospect, investors quickly connected the dots to see that a rudderless government is the most likely outcome in the forthcoming election, further hampering sterling.
Moody’s Investor Services separately cautioned that as the tide of government support for the U.K. banking system slowly ebbs out, it will leave exposed those financial services companies that have failed to improve their funding position. The reports together were taken negatively by sterling today which also fell to 90.61 pence against the euro.
Euro – Having risen to $1.3700 on Monday, the euro is back on the defensive today and retreated to an intraday low at $1.3550. Most recently the single European currency traded at $1.3558. It also shed ¥1.3 to stand at ¥121.73. Friday’s low against the dollar was at $1.3530 and only if the euro can hold above here will it start to look constructive.
U.S. Dollar – A Manpower Inc. survey suggests that the recovery in employment is expanding into the second quarter, while jobs growth across emerging markets is also likely to continue its expansion. The world’s second-largest temporary employment agency said that of 18,000 surveyed companies, 76% leave hiring intentions unchanged between April and June while 16% said they’d expand the number of workers. The most optimistic response came from companies located in the North East. Within emerging markets it’s no surprise to learn that hiring intentions were strongest within nations such as Brazil and India, while they were the weakest in Italy, Spain and Ireland. Some analysts claim that without the adverse impact of winter snowstorms, the February reading of U.S. employment would have shown jobs added. Previous data during disrupted winters have shown sharp rebounds in job additions during March. The ongoing U.S. economic recovery is bolstering the dollar under current conditions.
Japanese yen – We’ll just have to wait and see how far the yen rises in response to the seasonal impact of repatriation. With global equity markets around 60% higher than this day a year ago, the world is in far fitter shape and the recovery remains encouraging. And so the premise that the yen is rising on a risk aversion theme has to go down as a somewhat bogus claim today. We await any word from the Bank of Japan, which is supposedly mulling ideas on how to breathe life into the Japanese economy. The impact of further quantitative easing via additional government bond pressures should serve to weaken the yen, which currently stands at ¥89.75 against the dollar.
Aussie dollar – A buoyant ANZ job survey for February made the previous month’s downturn appear to be little more than an aberration. The measure of newspaper advertisements and Internet job listings increased 19.1% – the largest jump in the reading since it was first compiled in 1999. The data comes days ahead of the February employment report, which might prove so strong that it will prevent the RBA from taking a breather after its February interest rate hike to 4.00%. The Aussie unit jumped in the immediate aftermath of the data and reached 91.17 U.S. cents. However, a reversal in attitude towards risk later saw the dollar and yen both rally sending the Aussie back to a low at 90.56 cents. The Aussie is currently trading at 90.76 cents, while it’s lower on the day at ¥81.50 against the Japanese unit.
Canadian dollar – The Canadian dollar remains just a fraction of a penny above 97.00 U.S. cents this morning and has lost some impetus on account of a gentle decline in key crude oil and gold prices. Gold has slipped by $11 per ounce while crude at $80.25 per barrel remains north of psychological support at $80.00.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.