Vantage FX | G7 Strengthens Yen, Aussie bounces nicely| 13th February 2013

February 13, 2013

Currency rates are in many ways the most important transfer price for an economy given the level of global trade and the openness of global finance these days. So a weaker currency can often help more materially than monetary policy can directly impact on growth. Just look at China and imagine how it would be doing if the Renmimbi went to 5, 4 or 3 to the US dollar from the current level. China’s value proposition to the world would be very different.

So it has been that the Fed’s QE has tacitly been targeting a weaker US dollar and Mario Draghi told us all what we knew last week that the ECB didn’t want a stronger Euro choking off the German or by extension European recovery. But it has been the Yen’s sharp move from 78 to 94 and the Bolivar’s roughly 33% devaluation that seems to have galvanised the G7 that the tacit was becoming or had become overt.

Consequently overnight the G7 released the following statement,

We, the G7 Ministers and Governors, reaffirm our longstanding commitment to market determined exchange rates and to consult closely in regard to actions in foreign exchange markets. We reaffirm that our fiscal and monetary policies have been and will remain oriented towards meeting our respective domestic objectives using domestic instruments, and that we will not target exchange rates. We are agreed that excessive volatility and disorderly movements in exchange rates can have adverse implications for economic and financial stability. We will continue to consult closely on exchange markets and cooperate as appropriate.

No reference to the Yen but it seems clear it’s gone a bit far for the G7 but the nod to “market determined exchange rates” and comment that “we will not target exchange rates” rings a bit hollow. As we noted yesterday it seems Venezuela’s actions have really spooked the G7.

But in Japan yesterday news filtered out that over the weekend Economy Minister Amari said that the LDP Government was still keen to goose stocks higher by the end of March. We missed this until yesterday but it is worth reiterating as it shows the tension between the G7 statement and the wishes and actions of governments around the world.

It will be important to show our mettle and see the Nikkei reach the 13,000 mark by the end of the fiscal year (March 31),” Amari said in a speech…“We want to continue taking (new) steps to help stock prices rise” further, Amari stressed, referring to the core policies of the Liberal Democratic Party administration — the promotion of bold monetary easing, fiscal spending and greater private sector investment.

Business Insider reckons that this implies a USDJPY of more than 104 given the recent relationship. So it’s still a case of do as we say not as we do for the G7.

As the chart above shows even with yesterday’s strength in the Yen it remains in a very strong uptrend. We have had a few attempts to call a top in this run which we still believe eventually takes it above 100 but perhaps just perhaps the bulls may think a little more before adding to longs which may see USDJPY drift a little lower but while above our fast and slow moving averages and above the trendline the bias is still higher.

In other FX markets the Aussie has had a fairly solid recovery of a 1.0222 low to sit atop 1.03 again this morning. As we noted yesterday the Majors believed that the Aussie would find some solid buying below 1.03 which has been correct so far but the selling must have been heavy or the buyers absent for it to fall to 1.0220ish – so the battle continues. Sterling is basically unchanged at 1.5653 after another 1 big figure range. Euro likewise moved through more than 100 points and is up 0.29% to 1.3444 while the USDJPY is down 0.80% at 93.55.

As you can see in the chart above the Aussie has been quite volatile and given the width of the Bolly bands we would favour buying dips rather than getting too bearish just at the moment below 1.03. on the short term charts a move through 1.0320 would open up further topside on the day.

On stocks it was a good night with Europe up largely across the board. The FTSE rose 0.98%, the CAC was 0.99% higher, Madrid rose 1.88%, Milan pushed 0.69% higher and the DAX was up 0.35%.

In the US at the close the Dow has pushed through 14,000 up 0.35% at 1402 for the highest close since 2007, the S&P 500 is up 0.13% while the Nasdaq dropped back a little falling 0.19%.

In Asia today we’ll be watching the Nikkei to see if it is going to flow with Amari’s wishes toward 13,000 or sag with the Yen’s recent strength. The big question is can the Nikkei break away from its super strong correlation with the Yen? We doubt it because it is the Yen that is driving the outlook so the next little while will be interesting.

On Commodity markets Nymex crude rallied another 0.45% to $97.48 Bbl, Gold hardly moved and sits at $1649 oz. while Silver is up 0.35% at $31.08 oz. The ags were down again with Corn off 0.85%, Wheat down 1.28% and Soybeans 0.73% lower. Frozen OJ gets the gold star for move of the day up more than 5% – what a trade this has been lately.

Data

We think that US President Obama’s State of the Union speech coupled with retail sales in the US will be the key market movers, leaving aside any random statements that might come out about FX rates, in the next 24 hours. Eurozone Industrial production is also important and Crude traders will be watching the EIA release.

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