FX5: Mr. “Yen” Sakakibara Sees ¥105

Friday March 18: Five-things the markets are talking about

It’s been a tough week for investors having to interpret the plethora of central bank monetary policy announcements.

The highlight has been the Fed. Chair Yellen and company was certainly more ‘dovish’ than expected, and this has driven the ‘mighty’ dollar to new multi-month lows across the board. Yields have been pared back, and equities finally taken back much of what they have lost this year.

The bad, the ECB and BoJ will not be happy how their own currencies have performed, especially Draghi as he has been the aggressor to get Eurozone inflation/deflation some much needed traction.

With the dollar remaining under substantial pressure has led to market speculation that ECB and BOJ officials may feel forced to say something soon.

1. Central bank frenzy confuses global markets

Federal Open Market Committee (FOMC): This weeks Fed statement was much more “dovish” than expected. The dot chart was tightened, and now projects only two rate hikes this year. Ms. Yellen has cautioned the market that the U.S inflation rate is not picking up fast enough, hence their go-slow on tightening.

Swiss National Bank (SNB): Held interest rates at a record low and repeated its pledge to intervene in currency markets. Despite SNB’s Jordan reiterating that the CHF is still significantly overvalued, Swiss policy makers have refused to join the ECB in the race to the bottom. Given that last week’s ECB stimulus failed to have much impact on EUR/CHF, the SNB had the room it needed not to act.

Norway’s Norges: Lowered its key interest rate -25bps to +0.50% and suggested more rate cuts this year were possible and that the central bank couldn’t “exclude the possibility that the key policy rate may turn negative.”

Bank of England (BoE): All nine members of the MPC voted to keep rates at record lows. Members cited the most common of Central Bank rhetoric, worries about global growth and uncertainty ahead of the E.U referendum.

South Africa’s Reserve Bank: It raised its benchmark repo rate by +25bps to +7.0% as it tries to tame rising inflation in a slow-growth environment.

Bank Indonesia: It cut its interest rates for the third time this year, trimming its benchmark rate by a quarter of a percentage point to +6.75%. It also cut its deposit facility and its lending facility by a quarter percentage point each to +4.75% and +7.25%, respectively.

European Central Bank (ECB): Rhetoric Friday morning from various board members suggests that the ECB still has room to cut interest rates should the euro area’s economic recovery falter.

2. DOW wipes out losses for the year

The Dow Jones Industrial Average turned positive for the year after rising +155pts or +0.9%, to 17,481, bringing it to a gain of +0.3% so far this year. U.S equities have remained better bid after the Fed suggested they would likely only raise interest rates twice this year.

Yesterday’s rally on Wall Street wiped out a year-to-date decline that swelled to as much as -10% only a month ago. The questions investors should be asking is whether this rally is economically or ‘free’ money driven and how long this rally will last given the continued uncertainties such as oil prices?

3. WTI Crude trades above $40

West Texas crude oil futures (U.S benchmark) rose +4.5% to $40.20 a barrel yesterday for the first-time this year, extending its rally that has seen prices rebound +53% from their lowest print recorded in mid-February ($26.21).

Since the historic plunge in price, support for crude has come from three areas. One, such low prices would force producers to curtail output and that the global glut of the past two years would begin to subside. Two, support from a weakening dollar on pared back rate hike expectations and third, technical short positions been squeezed.

Investors should still focus on supply. Does the global glut persist or is crude’s rally driven by ‘expectations’ of improvement rather than ‘actual’ change in supply?

4. China’s property bubble and record Yuan fix

Data overnight showed that China’s property prices rose for the tenth consecutive month at +0.4% vs. +0.3% m/m prior, while their year-over-year price increase was fifth straight at +3.6% – well above +2.5% print in February (prices m/m fell in 15 out of 70 cities vs. 24 prior, and y/y fell in 37 out of 70 cities vs. 45 prior).

The People’s Bank of China (PBoC) has kept pace with the post-FOMC USD weakness by registering the strongest Yuan fix for this year (sets Yuan mid-point at ¥6.4628 vs. ¥6.4961 prior) along with an open market operation of over +¥100b.

5. Yen longs spooked by Bank of Japan (BoJ)

Not for the first time this week, USD/JPY (¥111.29) has so far been unable to hold below the ¥111 level after rumors that BoJ was checking rates. A weaker yen has been the cornerstone of PM Abe’s program to revive the economy. But risk aversion position taking continues to support the currency.

The market has been record short yen futures’ and the latest dollar move has many speculating some form of intervention by the Government or BoJ. Technical analysts have eyed ¥110 as that breaking point.

However, according to Mr. “Yen,” former Minister of Finance Eisuke Sakakibara (was in charge of currency intervention), he remains more bullish on his own currency, seeing it rallying to ¥105 in H2 as the outlook for the world economy worsens. He said that “a climb to ¥105 only then is likely to prompt Japanese officials to intervene verbally to try and talk it down, while gains past ¥100 could see physical intervention to weaken it.”

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