Ahead of the US session today, risk is mounting an impressive comeback, as AUDUSD takes back parity and pre-March 11 tsunami levels and the USD index scrapes around at its lowest levels since late 2009. Is this there any hope for the greenback?
Japan and repatriation effect.
Japan and repatriation effect.
An FT Alphaville article points out the similarities and differences in comparing the current catastrophe in Japan with the situation in the wake of the Kobe quake in 1995. Namely, the need for repatriation of JPY to pay for damage, etc., as well as the fact that we are rapidly approaching the financial year-end in Japan on March 31. Note that in 1995, the JPY strengthened sharply as the year-end approached and continued to strengthen into April before bottoming for good mid-month. The key difference this time around, as the article points out, is that interest rate differentials for Japan vs. the rest of the world are so small that hedging FX exposure is far cheaper this time around than it was back then, when carry considerations made hedging prohibitively expensive and therefore the currency risk was far greater. For a baseline comparison on rates, consider that while Japanese 2-year government bonds yielded almost 2.0%, while German yields were 5.0%, the US yield was a staggering 6.0% (my how times have changed) and the Australia yield was well north of 8.0%.
The subtext here is that the JPY strengthening potential may be less forceful than market consensus believes, though it will be hard to determine the non-intervention, market-clearing level for the yen for some time to come now that we have seen coordinated intervention. The article also helpfully points out that a currency like the AUD yields too much for efficient hedging and that more than half of outstanding uridashi bonds (bonds bought by Japanese investors but denominated in a foreign currency) are denominated in AUD. So the AUDJPY cross could be one of the more interesting JPY crosses in coming weeks in testing the strength of the repatriation flows. The volatility in that cross has been extreme, to say the least in recent days, with a 10% range over the last week of trading. And looking at today’s level in AUDJPY, there is no evidence of repatriation flows – quite the opposite, in fact as the pair has bounced stunningly off the lows of last week.
Chart: AUDJPY
AUDJPY has been one of the most volatile JPY pairs as the market tries to sort through the implications of the March 11 disaster for the JPY. The popularity of AUD denominated uridashi and the expense of hedging AUD exposure in JPY due to interest rate differentials suggests that AUDJPY may be the most sensitive to the repatriation effect – though the current coordinated intervention of G-7 is obviously an unknown quantity in counterbalancing any potential repatriation effect.
AUDJPY has been one of the most volatile JPY pairs as the market tries to sort through the implications of the March 11 disaster for the JPY. The popularity of AUD denominated uridashi and the expense of hedging AUD exposure in JPY due to interest rate differentials suggests that AUDJPY may be the most sensitive to the repatriation effect – though the current coordinated intervention of G-7 is obviously an unknown quantity in counterbalancing any potential repatriation effect.
USD struggling
The USD is struggling as risk is vaulting higher ahead of the US open, where the equity market looks like it is pretending that the catastrophe in Japan never occurred. With risk/commodity currencies suddenly back in vogue today, AUD and CAD are the focal points of USD weakness as the Euro finally takes a back seat. Interest rate differentials suggest that the USD should be getting far more respect here, but clearly the market has taken its eye off this formerly so important indicator for the moment. Let’s see if the market can continue to ignore this indicator for another week, however, before we dismiss the importance of rate differentials. Also negative for the USD at the moment is the situation in Libya and oil prices pressing back higher again. The May Brent crude price is back within a couple of dollars of its highs over the last month of trading.
The USD is struggling as risk is vaulting higher ahead of the US open, where the equity market looks like it is pretending that the catastrophe in Japan never occurred. With risk/commodity currencies suddenly back in vogue today, AUD and CAD are the focal points of USD weakness as the Euro finally takes a back seat. Interest rate differentials suggest that the USD should be getting far more respect here, but clearly the market has taken its eye off this formerly so important indicator for the moment. Let’s see if the market can continue to ignore this indicator for another week, however, before we dismiss the importance of rate differentials. Also negative for the USD at the moment is the situation in Libya and oil prices pressing back higher again. The May Brent crude price is back within a couple of dollars of its highs over the last month of trading.
Looking ahead
The Euro is cooling its heels a bit after getting an enormous bump off the coordinated intervention news late last week. This is a critical week for the Euro with the EU summit up over the weekend. But if we look at the factors driving EURUSD higher, we strongly wonder whether there is much juice left in the tank – the resolution of the PIGS crisis will take far more heavily lifting from politicians and the ECB, we haven’t even seen how the currency will weather its first real default (take your pick between Ireland or Greece) and one would think that the hawkish ECB angle can only lose momentum from here on out. As for risk appetite, sideways is the best bet for equities until/unless QE3 crystallizes into a more tangible reality. We may see a try at the 1.4283 high from November and maybe even a nudge or two higher, but the air is already getting thin for the Euro. There may be some positive EUR pressure in the short term, by the way, from the T-Mobile/ATT deal (in which ATT is offering to buy Telemobil for $39 billion).
The Euro is cooling its heels a bit after getting an enormous bump off the coordinated intervention news late last week. This is a critical week for the Euro with the EU summit up over the weekend. But if we look at the factors driving EURUSD higher, we strongly wonder whether there is much juice left in the tank – the resolution of the PIGS crisis will take far more heavily lifting from politicians and the ECB, we haven’t even seen how the currency will weather its first real default (take your pick between Ireland or Greece) and one would think that the hawkish ECB angle can only lose momentum from here on out. As for risk appetite, sideways is the best bet for equities until/unless QE3 crystallizes into a more tangible reality. We may see a try at the 1.4283 high from November and maybe even a nudge or two higher, but the air is already getting thin for the Euro. There may be some positive EUR pressure in the short term, by the way, from the T-Mobile/ATT deal (in which ATT is offering to buy Telemobil for $39 billion).
The GBP got a bump from positive Rightmove house price data and on comments from the BoE’s Dale, who today expressed confidence in the prospects for the UK recovery in a foreword to the BoE’s quarterly bulletin. Tomorrow is CPI day for the UK and GBP crosses are likely to pivot off that important release. The BoE minutes are set for release on Wednesday, though they are already “ancient history” with the EURGBP valuation is looking more than a bit stretched at the moment, though we need to see a move back below 0.8600 to have any confidence that the run-up there is behind us.
Meanwhile, we still have to focus on the situation with the nuclear reactors in Japan and hope that the situation there is resolved for the better by the end of the week. It appears markets are already making that bet, though there is also a budding crisis in worries over radiation-tainted food that could put world food prices back on the front burner rather quickly.
Be careful out there.
Economic Data Highlights
- UK Mar. Rightmove House Prices rose +0.8% MoM and +0.9% YoY vs. +0.3% YoY in Feb.
- New Zealand Feb. Credit Card Spending fell -0.3% MoM and rose +5.3% YoY vs. +5.5% YoY in Jan.
- US Feb. Chicago Fed National Activity Index out at -0.04 vs. -0.2 expected and -0.01 in Jan.
Upcoming Economic Data Highlights
- US Feb. Existing Home Sales (1400)
- Japan Feb. Supermarket Sales (0500)
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