Japan intends to keep us on our toes

Outlook:

We have a fair amount of news and data this week, including the minutes of the last FOMC, but one thing is for sure—Japan intends to keep us on our toes. We have had on-again/off-again stories for several months now, and the deduction is inescapable that it’s a strategy. Buy foreign bonds or not, extend tenor of JGB’s bought by the BoJ or not, one BoJ chief or another... name a Nikkei target or yen target, or deny them. Today the FT reports that Abe and Aso have different views about the BoJ’s role. Really?

The big deal will be Abe’s meeting with Obama on Friday. We mere mortals will not get to discover what is said, but you can bet that Japan’s relationship with China is higher on the list than the dollar/yen. Abe very nearly ruined his last stint as PM with right wing and militarist rhetoric, and now speculation is rife that he will put it aside (mostly) to focus on real economic improvement. At a guess, this is what the US would prefer, and is probably willing to offer the carrot of refraining from talk about the yen (or even help intervening if it comes to that). Don’t mock—the coordinated intervention of the US and Japan during the Clinton administration coincided with Pakistan’s first nuclear test. People who babble about currency wars don’t have a clue.

We get the FOMC minutes on Wednesday and CPI on Thursday, with a slew of Fed officials speaking. The big question is whether we get any whispers and sighs about when the Fed will trim or otherwise modify QE. A problem may loom in the form of paying banks interest on reserves to the tune of billions while at the same booking losses on interest no longer earned on holdings of Treasuries once the Fed retreats from QE. It will look bad, as St. Louis Fed Bullard told the FT. It doesn’t change the substance of monetary policy but could cause a public relations backlash, seeming to favor the banks. “At the moment it only pays 0.25 per cent interest on those reserves. But according to its exit strategy, published in June 2011, the Fed plans to raise interest rates before it sells assets. Interest of 2 per cent on $2.5tn of reserves would run to $50bn a year.”

Hmm, however this turns out, we can mark this week as the week the market is well and truly getting serious about the end of QE, exactly as the Market News fixed income reporter has been warning for a few weeks now. Having said that, Bloomberg makes the important point that the unemployment target of 6.5% is tremendously far away, since economic improvement brings discouraged workers out of the woodwork and a great deal of the “gains” in employment are really due to a drop in the participation rate.

Also we are nearing the sequester date (March 1) and Congress is nowhere to be found—it’s in recession until Feb 25. We still do not have a reconciliation of competing forecasts of how much growth will be damaged by the sequester. Some say 1-2% and some say practically nothing, at least not at first. The markets’ nonchalance toward this subject is stunning. But maybe that’s why risk appetite is not soaring. In fact, US Treasury yields are a bit lower this morning, and so are Bunds. Maybe there is fear, just not coherent and well-organized. In any case, we always worry when the dollar looks strong for unclear reasons. We would have guessed the strong ZEW data would propel the euro upward—and it may yet do so.

	SPOT	CURRENT POSITION	SIGNAL STRENGHT	OPEN DATE	OPEN RATE	POSITION GAIN/LOSS
USD/JPY	93.57	LONG USD	STRONG	10 /17/12	78 .71	15.88%
GBP/USD	1.5495	SHORT GBP	STRONG	01/18/13	1.5942	2.80%
EURO/USD	1.3346	LONG EURO	STRONG	11/26/12	1.2970	2.90%
EURO/JPY	124.89	LONG EURO	STRONG	11 /21/12	105.38	18.51%
EURO/GBP	0.8613	LONG EURO	STRONG	11/26/12	0.8095	6.40%
GBP/JPY	144.99	LONG GBP	STRONG	11/21/12	131.02	10.66%
USD/CHF	0.9230	SHORT USD	WEAK	01/30/13	0.9163	-0.73%
USD/CAD	1.0116	LONG USD	STRONG	01/24/13	0.9993	1.22%
AUD/USD	1.0345	SHORT AUD	STRONG	01/28/13	1.0392	0.45%
AUD/JPY	96.81	LONG AUD	STRONG	10/17/12	81.19	19.24%
USD/MXN	12.6808	LONG USD	WEAK	02/12/13	12.7736	-0.73%