The S&P downgraded Japan’s sovereign debt one notch and put the outlook on negative due to the country’s debt burden. USDJPY jumped to attention again after yesterday’s sell-off attempt. Is the US next on the bond ratings agencies’ list?
The JPY was sharply weaker today after S&P downgraded Japan’s sovereign debt by a notch. This was after the USDJPY pair played cat and mouse yesterday with key pivot areas around 82.40. There’s hardly been a reaction at all in Japanese interest rates, with the 2-year trading about 2 bps higher and CDS prices some 4 points higher according to a Bloomberg article, so we wonder if the currency market is overshooting here and if the move could be about nervousness in this key pivot area in USDJPY. It does help that pair’s case to the upside that US bonds are sharply lower this morning (in all theory, though, if we are going to talk about sovereign credibility, the US can’t be far in line behind Japan.). But we need a firm sign of panic in the Japanese debt market or in Japanese CDS prices to see the sovereign debt story to develop further.
We’ve talked a long time about Japan’s sovereign debt burden and the apparent impossibility of the country ever digging itself out from under its debt obligations. Japan has the largest public debt load as a percentage of its GDP. At the same time, the market has rarely taken this common knowledge and done anything with it (with Japan more or less trading on straightforward interest rate spreads, though there has been a tendency for Japanese CDS prices to creep higher relative to other major countries) and the bond ratings’ agencies have done little to point out the situation themselves – that is, until last night.
It’s a bit surprising to see the timing of the S&P announcement, which might have waited for bond yields to head a bit higher first (because as yields rise, the crushing weight of interest rate payments on the Japanese budget becomes rapidly hard to sustain. Despite very low interest rates of the last several years, the country dedicates something like 25% of its budget to interest rate payments. ) The announcement will theoretically affect international and possibly even domestic appetite for Japanese sovereign debt – but we’d prefer to see the proof in the CDS prices and interest rate spreads – we’ll be sure to track this closely in coming weeks and keep you updated. The S&P announcement is only worth the bond market’s reaction to it. If Japanese yields start to show more volatility than, for example, their US counterparts, this would be an interesting follow-up signal. This ticking time bomb will eventually go off.
It’s a bit surprising to see the timing of the S&P announcement, which might have waited for bond yields to head a bit higher first (because as yields rise, the crushing weight of interest rate payments on the Japanese budget becomes rapidly hard to sustain. Despite very low interest rates of the last several years, the country dedicates something like 25% of its budget to interest rate payments. ) The announcement will theoretically affect international and possibly even domestic appetite for Japanese sovereign debt – but we’d prefer to see the proof in the CDS prices and interest rate spreads – we’ll be sure to track this closely in coming weeks and keep you updated. The S&P announcement is only worth the bond market’s reaction to it. If Japanese yields start to show more volatility than, for example, their US counterparts, this would be an interesting follow-up signal. This ticking time bomb will eventually go off.
Chart: USDJPY
USDJPY has been playing cat and mouse with support and resistance levels in a tighter and tighter zone lately. The jump overnight makes it look like the pair wants to jump higher again, but as we discuss above, the reaction in FX has been larger than the reaction elsewhere, so let’s see what the JPY and bond markets do over the next day or two and see if the pair can close north of the 55-day moving average (red line) again.
USDJPY has been playing cat and mouse with support and resistance levels in a tighter and tighter zone lately. The jump overnight makes it look like the pair wants to jump higher again, but as we discuss above, the reaction in FX has been larger than the reaction elsewhere, so let’s see what the JPY and bond markets do over the next day or two and see if the pair can close north of the 55-day moving average (red line) again.
RBNZ
The RBNZ left its rate unchanged as expected, but its comments on the economy were generally positive and it kept language about the eventual need to remove accommodation. This saw quite a boost in the kiwi, which is much stronger against the hapless Aussie as the AUDNZD pair moves lower toward its 200-day moving average below 1.2800. Forward interest rate expectations jumped a few bps in response to the announcement and NZDUSD pulled back through 0.7700, though we wonder if it is sustainable above that level. Risk appetite determines the answer to that question.
The RBNZ left its rate unchanged as expected, but its comments on the economy were generally positive and it kept language about the eventual need to remove accommodation. This saw quite a boost in the kiwi, which is much stronger against the hapless Aussie as the AUDNZD pair moves lower toward its 200-day moving average below 1.2800. Forward interest rate expectations jumped a few bps in response to the announcement and NZDUSD pulled back through 0.7700, though we wonder if it is sustainable above that level. Risk appetite determines the answer to that question.
US data
An extremely lousy US weekly claims report ironically setting up tomorrow’s likely announcement of solid growth for last quarter. The weekly initial jobless claims number showed us that the seasonal bump of firings was simply a bit smaller than expected (perhaps because hirings heading into the holidays were also lousy?) and that we are back to a grim picture in claims. This is very bad news for the US economy/confidence. But how does the market take it? If it is taken as risk negative, we could yet see the USD rally a bit later today. If this sees the market putting on the QE3 trade….but wait, remember the blood pressure….we won’t go there for now, but you get the idea.
An extremely lousy US weekly claims report ironically setting up tomorrow’s likely announcement of solid growth for last quarter. The weekly initial jobless claims number showed us that the seasonal bump of firings was simply a bit smaller than expected (perhaps because hirings heading into the holidays were also lousy?) and that we are back to a grim picture in claims. This is very bad news for the US economy/confidence. But how does the market take it? If it is taken as risk negative, we could yet see the USD rally a bit later today. If this sees the market putting on the QE3 trade….but wait, remember the blood pressure….we won’t go there for now, but you get the idea.
The Durable Goods Orders number looks soft, but the nondefense, non-aircraft capital goods number was a strong +1.4%, so actually not that bad there.
Looking ahead
With the FOMC ending as a real fizzler in terms of providing new impetus for market direction (despite having done so on number occasions in recent months), we now shift our attention to tomorrow’s GDP number from the US as the next possible catalyst for a market move. Consensus is looking for 3.5% annualized growth.
With the FOMC ending as a real fizzler in terms of providing new impetus for market direction (despite having done so on number occasions in recent months), we now shift our attention to tomorrow’s GDP number from the US as the next possible catalyst for a market move. Consensus is looking for 3.5% annualized growth.
Meanwhile, European yields head higher and higher as conditions there get tighter and tigher. Is this a productive way to deal with a sovereign debt crisis? Tight Trichet is on the prowl, and EUR appears ready to ride the spike as high as it can go – but it makes little sense. Perhaps we should watch Brent crude prices as a barometer for when the market decides to back off the ECB (after all, we are trained to believe that Trichet will hike even as an economy falls of a cliff face as was done in the summer of 2008). The US crude prices have been misleading, after all. The rest of the world is looking at almost 100-dollar crude while US inland prices are at 87 dollars. In Europe today, the ECB’s Nowotny said that the market is getting too worked up about the prospect for a larger rescue fund. Is anyone out there listening? Hello?
Be careful out there – these are strange times and I would suspect that the current low implied volatility levels in FX-land are extremely misleading.
Economic Data Highlights
- Japan Dec. Adjusted Merchandise Trade Balance out at ¥707.3B vs. ¥523.9B expected and vs. ¥536B in Nov.
- UK Jan. Hometrack Housing Survey saw prices fall -0.5% MoM and -2.2% YoY vs. -1.6% YoY in Dec.
- Sweden Jan. Consumer Confidence out at 23.7 vs. 21.0 expected and 20.8 in Dec.
- Sweden Q4 Manufacturing Confidence out at 12 vs. 5 expected and 5 in Q3
- Sweden Dec. PPI out at +2.2% MoM and +4.3% YoY vs. +0.6%/+2.9% expected, respectively and vs. +2.2% YoY in Dec.
- Sweden Dec. Unemployment rate rose to 7.4% vs. 7.3% expected and 7.1% in Nov.
- UK Jan. CBI Reported Sales out at 37 vs. 38 expected and 56 in Dec.
- Germany Jan. Preliminary CPI out at -0.5% MoM and +1.9% YoY vs. -0.3%/+2.0% expected and vs. +1.7% YoY in Dec.
- US Dec. Chicago Fed National Activity Index out at 0.03 vs. 0.11 expected and -0.4 in Nov.
- US Dec. Durable Goods Orders out at -2.5% MoM and ex Transportation at +0.5% vs. +1.5%/+0.9% expected, respectively
- US Weekly Initial Jobless Claims out at 454k vs. 405k expected and vs. 403k last week
- US Weekly Continuing Claims out at 3991k vs. 3873k expected and 3897k last week
Upcoming Economic Calendar Highlights (all times GMT)
- US Dec. Pending Home Sales (1500)
- Japan Dec. Jobless Rate (2330)
- Japan Dec. Overall Household Spending (2330)
- Japan Dec. National CPI (2330)
- Japan Dec. Retail Trade (2350)
- UK Jan. GfK Consumer Confidence (0001)
- China MNI Business Condition Survey (0135)
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