Equity Rally or Dollar Sell-Off

The recent (since June) equity rally looks awfully tame / non-existent in Euro terms.



Source: Yahoo

Help Jake Understand: Yen Intervention Edition

The WSJ details:

The yen plummeted against the dollar Wednesday after Japan intervened in currency markets for the first time in more than six years.

The dollar gained more than 3% against the Japanese currency after having dropped Tuesday to its lowest level in 15 years vs. the yen. Japan's Ministry of Finance said it would intervene again Thursday in currency markets if necessary.

Concerns over the pace of the U.S. recovery have recently sent investors flocking to the perceived safety of the yen, especially as investors speculate whether the Federal Reserve could implement another round of asset purchases to kick-start a moribund economy, which would likely weigh further on the dollar.

First of all... I am many things and a currency expert is not one of them...

With that said... I completely understand why Japan is intervening in the currency markets for economic purposes (a strong yen is hurting exports), BUT isn't the ability to literally print an overvalued piece of paper the ultimate prize?

For years, counter-fitters have printed worthless paper in the hopes of using it to buy things of value, but with Japan they can do this legally! Why not open up the printing presses and use that new currency to buy goods of value from abroad (I'm not talking other currencies, I'm talking REAL assets)?

To me this will result in at least one of the following (though, I'm sure there are 1000 more):

• A weaker Yen (i.e. the goal)
• Inflation (i.e. the best thing that could happen to Japan so that monetary policy would actually work)
• Nothing to the Yen or to inflation, which means you got a bunch of real assets... for free.

What am I missing?

Source: Yahoo Finance

Chinese Currency "Soars"

Kidding about the "soars", but the removal of the peg to the dollar was still the big news to come out over the weekend. Bloomberg details:

The yuan rose the most since a July 2005 revaluation and forwards jumped after China’s central bank ended a two-year peg before a Group of 20 summit this week.

The currency advanced 0.42 percent to 6.7976 per dollar as of 5:30 p.m. in Hong Kong, the biggest gain since July 2005, according to data compiled by Bloomberg. The 12-month non- deliverable yuan forward rose 1.1 percent to 6.6425, implying traders are betting on a 2.3 percent appreciation.

A stronger yuan will help curb inflation in the world’s third-largest economy and shift investment toward service industries from export-manufacturing, the People’s Bank of China said yesterday. The move may also deflect criticism from President Barack Obama and other G-20 leaders, who say China relies on an undervalued currency to promote overseas sales.

“It will be a very gradual appreciation but it could be front-loaded,” said Nizam Idris, a Singapore-based currency strategist at UBS AG, the world’s second-largest foreign- exchange trader. “The yuan will appreciate about 4 percent this year and 5 percent next year.”

Below we see the move... minimal (i.e. the "largest in 20 months" was only 0.4%) to say the least, but in the right direction (if in fact it is anything more than political maneuvering).



Source: Exchange-Rates

U.S. Dollar is King (for Now)

Source: Bloomberg

Risk Appetite Supporting the Euro

Bloomberg details:

The euro rose toward a nine-month high against the dollar before a government report forecast to show French industrial production increased for a third month in July, boosting demand for higher-yielding assets.

Europe’s single currency advanced against 13 of its 16 major counterparts on expectations Federal Reserve officials will today signal they plan to refrain from raising interest rates. The yen dropped to the lowest level in almost two weeks against the euro before a report this week forecast to show Japanese consumer confidence rose for an eighth month, paring demand for the currency as a refuge.

“Risk appetite is coming back on the table, supporting the euro,” said Susumu Kato, chief economist in Tokyo at Calyon Securities, the investment banking unit of Credit Agricole SA. “The euro is also benefiting from uncertainty about the U.S. economy. The euro-zone is likely to see a hike in interest rates before the U.S. does.”

The euro traded at $1.4497 at 11:13 a.m. in Tokyo from $1.4478 in New York yesterday, when it reached $1.4535, the highest level since Dec. 18. The dollar was at 92.37 yen from 92.32 yen. The yen fell to 133.90 per euro from 133.67, after earlier reaching 134.17, the lowest level since Aug. 28.

“Global growth indicators remain supportive for risk takers,” analysts led by Hans-Guenter Redeker, London-based global head of currency strategy at BNP Paribas SA, wrote in a research note yesterday. “The dollar will remain under selling pressure.”

**Please note the above data is of the Euro / Dollar ETF FXE**

Where's the Dollar Going?

WSJ reports:

"I think people are trying to figure out, after last week, whether or not that was the signal the (U.S. dollar) is headed lower," said David Watt, senior currency strategist at RBC Capital Markets in Toronto.

"Right now, it's not clear," he said.

While some analysts have argued last week's turn against the dollar reflects a pivotal shift in sentiment, uncertainty continues to cloud prospects for the economy, equity markets and the U.S. currency, and the dollar could rebound from recent selling, Watt said.

A report from Custom House, a currency services firm based in Victoria, British Columbia, said there may be a slight sense in currency markets that the relentless dollar selling last week was a bit overdone, and traders may not be quite as confident holding short dollar positions now as they were last week, when it seemed to be a one-way bet against the U.S. currency.

Warning: I am not a currency expert, BUT while the media has been calling the recent dollar move a sell-off (or Euro rebound) that is in regards to a VERY short time frame. Over the longer term, the Euro is still down 10% over the past year, thus don't write-off a continued sell-off / Euro rebound from here.



Source: Yahoo

Russia Sheds Dollars for Euros

The Moscow Times (via Brad Setser)

The euro's share in Russia's forex reserves, the world's third-largest, overtook that of the dollar last year as the country pressed on with a gradual diversification, the Central Bank's annual report showed.

The euro's share increased to 47.5 percent as of Jan. 1 from 42.4 percent a year ago, according to the report, which was submitted to the State Duma on Monday.

The dollar's share fell to 41.5 percent from 47 percent at the start of 2008 and 49 percent at the start of 2007.

As Brad points out:

It is often asserted that the dollar is the global reserve currency. It would be more accurate to say the dollar is the globe’s leading reserve currency.* The dollar is the dominant reserve currency in Northeast Asia. And the two big economies of Northeast Asia both happen to both hold far more reserves than either really needs. The dollar is also the reserve currency of the Gulf. And Latin America.**

But the dollar isn’t the dominant reserve currency along the periphery of the eurozone. Most European countries that aren’t part of the euro area now keep most of their reserves in euros. That makes sense. Most trade far more with Europe than the US – and some, especially in Eastern Europe, ultimately want to join the eurozone.

* The rise in global reserves means that the world’s central banks hold more euros as part of their reserves now than they held dollars in 2000. If demand for dollars hadn’t risen any more, the rise in demand for euro-denominated reserves would be a big story …

** Best that I can tell, South and Southeast Asia generally hold a far lower share of their reserves in dollars than the big countries in Northeast Asia.

Go read his whole piece here

Yen Continues Sell-Off... Plenty of Room to Go

Reuters reports:

The yen fell broadly on Monday, hitting its weakest against the dollar and the euro in nearly six months as investors took on perceived riskier assets on the view that a global economic downturn may have hit a bottom. The dollar rose as high as 101.45 yen, according to Reuters data, vaulting above 101 yen for the first time since last

"As long as stocks can retain their buoyancy ... risk appetite and risk-based trades will be in vogue and investors will continue to add to and rebuild yen short positions," said Jeremy Stretch, currency strategist at Rabobank in London.

Yen Shopping Spree Finally Here?

A strong currency has crushed the Japanese trade balance in recent months.



While the strong Yen makes Japanese businesses uncompetitive (Japan is an export based economy), there are benefits of having a strong currency. Back in October I pondered whether there would be a Yen Based Acquisition Spree on the Way? It looks like it may be. Bloomberg reports:

“A lot of assets have gotten extremely cheap and Japanese investors are looking to park their money somewhere,” said Kenichiro Ikezawa, who oversees about $3 billion as a fund manager at the second-largest brokerage in Tokyo. “Emerging markets including Brazil, Mexico and Turkey look attractive. We would like to invest more in such countries.”

After a year when the yen rallied against 177 currencies, Japan’s biggest money managers say the best is over in the foreign exchange market. The nation’s investors bought 940 billion yen ($10.3 billion) more international stocks and bonds than they sold in the five days to Jan. 31, the seventh week of net purchases, according to the Ministry of Finance.

Japanese companies are also taking advantage of the strengthening currency, spending record amounts on mergers and acquisitions outside the country. The total value of overseas takeovers more than tripled to $76.8 billion last year, according to data compiled by Bloomberg.

Euro Approaching Parity with Pound Sterling

Guardian (hat tip Credit Writedowns):

The world’s foreign exchanges were today readying themselves for parity between sterling and the euro after further selling sent the pound to within touching distance of a one-for-one exchange rate against the European currency.

The euro has risen by almost a third against the pound in the course of 2008, with an 18% appreciation in December alone. Sterling’s trade-weighted index against a basket of currencies fell to 74.2% of its 2005 value, its lowest since the Bank of England first kept daily records in 1990.

Yen Based Acquisition Spree on the Way?

The Yen has gained dramatically over the past few weeks. This has been especially true against the Pound, gaining an unbelievable 25% over the past month as the Yen carry trade unwinds.
This makes the performance of Japan's Nikkei 225 equity index distorted (it is down 35% over the past month). If one were to look at the Nikkei 225 against the FTSE in relative terms (i.e. in Pounds), we see that the Nikkei 225 is significantly outperforming the FTSE 100.
If the Yen continues to strengthen, I am curious to see if Japanese companies / investors will take advantage of the relative cheapness of non-Yen denominated companies, which appear to have value in local currencies, but VERY cheap in Yen. Is there a Japanese acquisition spree around the corner?

Is the Euro Decline a Signal of E.U. Trouble?

There is some great analysis as to why the Euro is plummeting / Yen is rallying over at Investor Insights, but David Merkel is much harsher in his analysis of the Euro and E.U.:

It is possible that the current crisis could destroy the Euro, and possibly the EU. I think of the Confederation, where the economic pressure became so great that an extra-constitutional coup took place to create the Constitution, and implicitly, the fiat Dollar that we live with to this day. Without political unity, fiat currencies have short shelf-lives. Alternatively, the crisis could create a Federal Europe where the central government has significant powers to the degree that France in the Eurozone would be similar to Texas in the US. I don’t see that as likely; there is not the same degree of trust across the Eurozone as there is in the US.

Cliff dive below:

The U.S. Peso

I can't tell if I like the chart or not as it's possibly too tacky (the pic is from a recent protest in D.C.), but can anything really be too tacky?


Mexico City, (Reuters)

The peso last Friday broke past 10 pesos per dollar for the first time since late 2002 on expectations that Mexico's central bank will further tighten borrowing costs to battle a spike in inflation.

That would further widen the spread between benchmark U.S. and Mexican interest rates and make peso-denominated assets more attractive to investors.