The Japanese have finally done it! Yesterday, I wrote that “even if Kan was not actively considering physical intervention to weaken the Yen before the elections, he will have warmed to idea when he wakes up in the morning and finds USD/JPY trading below 83.”
Warming to the idea was apparently an understatement as Kan woke up and decided that they have finally had enough and now is the time to intervene in the Yen. Prior to the DPJ elections I said Kan may intervene in the Yen to quiet local criticism and secure his job as Prime Minister. However I am clearly not a savvy politician as the smarter political move was for Kan to wait. With the DPJ elections now behind us, Kan’s government was able to intervene without it appearing to be a desperate move to hold onto his job.
Now that the central bank has intervened, the next question is whether their intervention will be effective and I believe it will – at least for the next few days. The reason is because this is a very monumental move. After crying wolf for the past few months by spewing out empty threats, the Japanese government has finally pulled the trigger. As you have seen today, USD/JPY had a violent reaction that certainly shook out a large number of shorts. This will make speculators more reluctant to load up on short USD/JPY positions going forward particularly since the government has threatened to intervene again if USD/JPY resumes its rise. Don’t forget that the Japanese government has MUCH deeper pockets than the SNB and the RBNZ who have also intervened in recent years.
In October we will find out exactly how much the Japanese government spent.
This morning, I published an article about how talk of BoJ intervention is keeping USD/JPY above water:
There is a lot of talk this morning that the Bank of Japan is checking currency rates. The Japanese Yen has continued to rise over the past 24 hours and by checking rates, the central bank is keeping a very close eye on where the Yen is trading. Given that it is almost 11pm in Japan right now on a Friday, the central bank is either very serious about intervening in the currency market or they want to keep currency traders on their toes. The 87.00 level for USD/JPY could very well be their breaking point. The risk of intervention is limiting the decline in USD/JPY on a day when the sharp drop in Dow futures should be driving it much lower. Over the past 6 months, we have seen a significant appreciation in the Japanese Yen to the point where the central bank can no longer ignore it. For example, the Yen has risen more than 40 percent against the British pound, Australian and New Zealand dollars.
See chart and continue reading article
Here’s a clip of the interview that I did with Bloomberg Television last night about where currencies are headed:
Click on the image to watch the video
US retail sales and producer prices were basically in line with expectations but that does not undermine the fact that the data was very weak and confirms that the Federal Reserve will be cutting interest rates by 75bp next week. USD/JPY hit a 13 year low last night after news that the automaker bailout plan is not going happen before the new year. Everyone had hoped that the automaker saga would come to an end, but lawmakers are not letting that happen. On Wednesday, I said that USD/JPY could hit to a new 13 year. At that time, the currency pair was trading at 92.50-93.00. The possibility of the US taking interest rates below Japanese levels should keep the US dollar soft going into the Fed interest rate decision on Tuesday.
Consumer spending fell for the fifth month in a row while producer prices dropped for the second straight month. The two biggest inputs into GDP are retail sales and trade. Consumers cut back spending more aggressively in October and November which suggests that GDP growth could take a big dive in the fourth quarter, especially with the widening of the trade deficit.
GDP Could Contract by 4 to 6% in Q4
GDP could decline as much as 4 to 6 percent in Q4, which would be the largest contraction in growth since the 1980s. In the first quarter of 1982, GDP fell -6.4 percent. A 4 to 6 percent drop in GDP would not be out of the ordinary given the current conditions in the US economy. In the fourth quarter of 1990, GDP contracted by 3 percent and in the first quarter of 1991, it contracted by 2 percent. The currrent recession is worse than the one the US economy experienced in the 1990s, so a contraction in growth exceeding 3 percent would actually be expected.
The biggest drop in consumer spending came from gasoline station receipts. Prices at the pump have fallen more than 50 percent since the summer and gas stations are suffering as a result. The only silver lining in the retail sales report is the fact that not every sector saw slower sales. Electronics and sporting goods were in demand but this rebound after at least 4 consecutive months of softer spending is probably related to Black Friday sales.
BTW: EUR/GBP is at the brink of hitting 90 cents – a move that I called on Dec 8
– Even G7 and Retail Sales Can’t Help the US Dollar
– Stronger Economic Data Keeps Euro Near its Highs
– British Pound Rallies on Surprisingly Strong Inflationary Pressures
Even G7 and Retail Sales Can’t Help the US Dollar
The US dollar has strengthened against all of the majors but the degree of strength is marginal considering the changes in the language of the G7 statement and the better than expected retail sales report. The main reason why the dollar did not rally as much as it could have is because with both reports, there is more than meets the eye. Even though the G7 is worried about the outlook for the global economy, the stability of the financial market and the volatility in currencies, the price action in the FX markets suggest that traders and investors believe that the G7’s words do not pack much punch. More specifically, the G7 called for more self-regulation by investment banks, which the banks balked at. They are also contemplating higher capital requirements for the banks but this would be only to prevent a future financial crisis rather than solving the present one. If such a rule was to be instituted today, it could make the capital markets even more illiquid. As for retail sales, even though the headline numbers increased more than expected, meaning that consumer spending did not contract for the second consecutive month, if gasoline was stripped out of sales, consumer spending was actually flat. Gas prices have increased 11 percent this year, taking a bigger bite out of the pocketbooks of US consumers. Inventories on the other hand have increased 0.6 percent while car sales have been the weakest in 10 years. It is difficult to believe that economy is improving as indicated by the headline retail sales figure when the nation’s fourth largest bank Wachovia posted a $393 million loss and cut its dividend. More banks will be reporting earnings this week and it will be important to see if the losses continue to build. In the corporate sector, survival has become the biggest focus. The potential for a merger between Delta and Northwest as well as Blockbuster’s bid for Circuit City stems from the need to reduce costs or to save an otherwise floundering business. Meanwhile the market’s focus tomorrow will turn to inflation and manufacturing. Strong inflationary pressures are practically a given, but a turn in manufacturing is up in the air. The market is looking for dollar weakness to boost production, but that was not the case in the month of March even though the dollar had weakened that month as well.
Stronger Economic Data Keeps Euro Near its Highs
The Euro sold off aggressively when the market opened Sunday night in reaction to the changes to the G7 statement. However those losses were recuperated throughout the late Asian, early European trading session. Unlike US economic data, Eurozone economic data was strong with no glaring underlying weakness. Growth in France, Germany and Spain continued to increase, albeit at a slower pace while growth in Italy contracted. Even though these numbers tell us that the Eurozone is beginning to slow, the problems are not as bad as the ones in the US and rather than repeated disappointments (even if they are beneath the headlines), there are still positive surprises. In addition, the European Central Bank continues to be very hawkish with ECB member Mersch telling us that there is no room to cut interest rates this year and ECB member Noyer indicating that there is no contradiction between price stability and growth. Unless the ECB changes their stance or economic data slows materially, any corrections in the EUR/USD may be limited. The German ZEW survey is due for release tomorrow. Even though analyst sentiment is expected to improve, they can be notoriously pessimistic.
British Pound Rallies on Surprisingly Strong Inflationary Pressures