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Japan's MoF threatening intervention as USDJPY scrapes to new lows

Thu, Dec 18 2008, 11:36 GMT
by John Hardy

Saxo Bank

German IFO number on tap today. GBP weakening vs. EUR more pronounced than when pound forced out of ERM in 1992.

HEADLINES

• Australia Q4 Westpac/ACCI Survey of Industrial Trends fell to 40.4 vs. 50.8 in Q3.

• New Zealand Dec. NBNZ Business Confidence was -35.0 vs. -43.0 in Nov.

• Japan Nov. Nationwide Department Store Sales fell -7.2% YoY vs. -8.4% in Oct.

• Switzerland Trade Balance rose to 2.15B vs. 1.95B in Oct.

• Switzerland Oct. Retail Sales rose 2.9% YoY vs. 2.0% expected

THEMES TO WATCH – UPCOMING SESSION

Events Today:

• Germany Dec. IFO (0900)

• Norway Dec. Unemployment Rate (0900)

• UK Nov. Retail Sales (0930)

• EuroZone Oct. Trade Balance (1000)

• Canada Oct. International Securities Transactions (1330)

• Canada Nov. Leading Indicators (1330)

• Canada Oct. Retail Sales (1330)

• US Weekly Initial Jobless Claims (1330)

• US Dec. Philadelphia Fed (1500)

• US Nov. Leading Indicators (1500)

• UK Dec. GfK Consumer Confidence (0001)

• Japan BoJ Target Rate (no time given)

Market Comment:

Currencies followed up with force on the new theme of currency devaluation risks after the US Fed's Bernanke declared all-out-war on deflation with Tuesday's dramatic new FOMC statement. GBP is also feeling the brunt of the selling pressure on this theme as chatter is developing over their potential for an eventual move into the netherworld of alternative monetary expansionism once the zero bound is attained by the BOE. It appears that the deleveraging trade has faded for now - some are even calling it complete (we're not so sure....). The focus now is clearly on the idea that the policy intent of the more activist central banks - with the Fed and the BOE in the vanguard - is to avoid deflation at all costs and hopefully even create a bit of inflation to avert the fearsome specter of debt deflation in an insanely overleveraged economy.

Interestingly, the latest moves will tremendously aggravate the risks of deflation in the economies where the CB is trying to pursue a more austere and conservative policy - and here we can especially point a finger at the ECB. The EUR is on an unsustainable move higher that will result in an even worse seizure of the EuroZone economy than would have already been the case. A tighter stance by the ECB in an otherwise profligate world will be extraordinarily deflationary for EuroZone. The market's interpretation of what is going on is clearly evident in the latest move in interest rate differentials since the FOMC statement heard around the world: The US 2-yr.
yesterday rallied sharply from new lows (new low around 60 bps, closed at 76 bps) while the German 2-yr. yield plummeted 20 bps yesterday to strong new lows at 1.80%. Thus, the last 1000 pips of the EURUSD rally has coincided with a 40 bp drop in the 2-year rate differential. The market is beginning to say that it suspects the Fed, despite promising to keep rates low "for some time", may eventually succeed sooner rather than later in creating some inflation. Meanwhile, the supercharged Euro and the ECB's tighter stance will result in a massive deflationary move (that will eventually force the ECB's hand). The question is: how long is this situation allowed to extend from here? Will all EuroZone members passively stand by while EURUSD charges to 1.60 again? The EUR is rapidly closing in on record highs on a trade weighted index. Thus, while we recognize the power of the EUR move and would never stand in its way until we see a technical reason to do so, there is something inherently unhealthy and unsustainable about what is going on here. It's a situation where the longer the trend continues, the more rapidly it will provide the reason for the trend to reverse.

Elsewhere, the Japanese MoF's Nakagawa was out overnight talking up the possibility of intervention. We're not so sure that this is a real risk at this time as JPY crosses generally have been rangebound outside of USDJPY and GBPJPY. Still, real intervention is a possibility and soon if the USD continues to broadly meltdown with the same rapidity in coming days and especially if the other JPY crosses suddenly begin to sell-off sharply as well. But if equities continue to rally in the US, we wouldn't be surprised to see USDJPY making a rally attempt of its own accord here. With the upcoming BoJ meeting and rate announcement (possible cut to zero?) tonight, is it time to look for a bottom in the cycle soon? The Japanese numbers are atrocious lately, though the market tends to ignore them.

Watch out for the German IFO number today. In this ridiculously thin market, which has already severely aggravated the EURUSD move, this number could generate plenty of volatility. Also keep an eye on UK Retail Sales, which are likely awful. The EURGBP rally has accelerated out of control on the same basic theme as we described for the USD. The BOE's Gieve and Bean have been out saying that zero interest rates are possible. The Woolworths chain in the UK has announced that it will be closing all of its more than 800 stores by January 4, and tens of thousands will lose their jobs.

The only currency outperforming the EUR at the moment is the Swiss Franc, which went ballistic versus the USD and GBP and even made significant ground against the EUR. This adds up to a USDCHF sell-off that created a historic move for the week - and it's only Thursday today. We suspect that the move was driven by positioning more than any fundamental trigger event.

Very important news for the rapidly declining Swedish Krona yesterday: the Swedish National Debt Office declared that it would purchase foreign currency debt to the tune of 15 billion SEK because "in our view, the krona exchange rate is far from the levels that can be justified by more fundamental conditions." It also stated that "The Debt Office has taken position three times previously based on the assessment that the krona was sharply undervalued". EURSEK corrected sharply lower on this news, though it has crept back above 11.00 this morning. For the longer term, a short EURSEK trade seems like a reasonable proposition as the EUR may be in a bubble phase and the SEK is undervalued.

It wouldn't take much for US numbers to look positive considering the powerful negative trend in data already in place. Take today's US weekly jobless claims, a number that has been on a scary uptrend all year - while we are not at all predicting a positive number, it would certainly be an interesting test of this thin and panicky market if we get an off-side reading on the positive side. Also, the PMI indices have fallen so low that it's almost impossible for them to continue to fall, due to the fact that the survey questions are answered on a comparative basis and eventually the acceleration of worsening by definition has to cease. This may be evident in these surveys in the coming month or two in the ISM's.

Chart: EURCHF

The EURCHF rally came unwound yesterday as CHF stormed stronger against the board. This appears to have broken up the relatively well organized uptrend of late. The 21-day moving average more or less contained the move and we could see a small consolidation here in the shortest term, but further out a drop back toward 1.5200 or lower is the preferred scenario now.

Published on  Thu, Dec 18 2008, 11:42 GMT