From a medium-term perspective, there will be a continuing lack of confidence in the Japanese fundamentals as the debt burden continues to increase and the government is forced to maintain a highly-expansionary fiscal policy. The Bank of Japan will also maintain a very aggressive monetary policy to help support the economy. The yen will gain support when risk appetite deteriorates and exporter selling will also increase when the dollar rallies. G7 will look to prevent any fresh surge in the Japanese currency.
The yen strengthened sharply in Asian trading on Tuesday as risk conditions deteriorated sharply. The Japanese central bank warned over the economic outlook and the nuclear crisis at the Fukushima complex was upgraded to level 7 from level 5, the same as the Chernobyl disaster in 1986. Japanese equity markets fell sharply and there was also a reversal in commodity prices which triggered profit taking on short yen positions and also discouraged carry trade activity.
The dollar did find support close to the 83.00 area and attempted to rally, but the yen proved more resilient as underlying risk appetite remained fragile. There was also a decline in energy and commodity prices which maintained pressure for a reversal in recent carry trades.
The Japanese Cabinet office downgraded the economic outlook for the first time in six months, maintaining the increase in fears surrounding the economy. The budget outlook will remain an important focus with further market expectations that funding pressures will intensify.
Finance Minister Noda stated that he had asked G7 members to act in the currency markets when needed. There will be further speculation of action to prevent a renewed yen surge and comments from international officials will be watched closely
Sterling:
Confidence in the growth outlook will remain weak in the short-term with continuing fears that downward pressure on consumer spending will undermine the economy as a whole. The lower than expected inflation rate will also ease immediate pressure on the Bank of England to raise interest rates, although inflation will still be a very important market focus. Overall, interest rates are likely to remain negative in real terms which will undermine support for Sterling. The UK currency will be more vulnerable when risk appetite deteriorates, but continuing vulnerability in other major currencies will remain the best form of protection.
The latest UK inflation data was significantly weaker than expected with a decline in the headline consumer inflation rate to 4.0% for March from 4.4% previously, in contrast to expectations for an unchanged rate. There was also a decline in the RPI inflation rate to 5.3% from 5.5%.
The decline in inflation triggered a further re-assessment of Bank of England policy with reduced expectations that the central bank would increase interest rates at the May MPC meeting, especially given the bank’s continued unease over the growth outlook. There was a test of support near 1.62 against the dollar an the UK currency also weakened to near 12-month lows beyond 0.89 against the Euro.
The latest UK labour-market data was mixed as a decline in the unemployment rate to 7.8% from 8.0% was offset by an unexpected increase in the claimant count. This increase was probably related to technical factors and the report over all did not provide much in the way of fresh evidence.
There was a small recovery in consumer confidence according to the latest Nationwide data. the latest RICS house-price index improved slightly to -23% for March from -26% previously. There was a sharp decline in the BRC retail sales index with a like-for-like sales decline of 3.5% for March, the weakest reading since 2005.
The UK currency will continue to gain important protection from a lack of confidence in the other major currencies, especially while the dollar remains on the defensive and the Euro will also find it difficult to advance further. |