A sliding Yen proves little controversy in Aylesbury as Growth tops the agenda.
Week Commencing Monday 13 May 2013
Overriding Market Themes
The group of seven finance chiefs at the G7 meeting in Aylesbury, Buckinghamshire indicated they will tolerate a sliding yen for now, as they intensified their focus on the Japanese recovery. Signalling an acceptance of the yen’s decline through 100 JPY per USD mark for the first time since 2009, G-7 policy makers said they examined Japan’s strategy and that they will monitor its impact on currencies. The yen has fallen nearly 25% against the US dollar since November, after Japan unveiled a series of aggressive moves to spur growth in its economy. The drop has helped boost exporters' profits and triggered a rally in the country's stock market, which has seen the Nikkei 225 index up more than 55% since November last year. Japanese policymakers have taken various measures as they try to revive the country's sluggish economy, a key part of which has been the Bank of Japan's decision to set a target inflation rate of 2%. Unlike other economies in the region, Japan has been fighting deflation for most of the past two decades, which in turn has dampened domestic demand as consumers and businesses have been putting off purchases, in the hope of getting a cheaper deal later on. Also, a weak yen bodes well for Japanese exporters, as it not only makes their goods cheaper internationally, which should boost demand, but also lifts their profits when they repatriate their foreign earnings back home.
Closer to home, UK industrial production was stronger than forecast in March, according to official figures. Drilling into the figures, it seems the main drivers of the rebound are a boosted manufacturing sector and a recovery in oil and gas output. The ONS figures stunned the market, which was widely expecting a 0.2% release from the UK earlier in the day instead of the 0.7% growth announced. Manufacturing output, a sub-sector of industrial production, rose 1.1%, boosted by electronics, metals and machinery. The extended period of cold weather also help the electricity, gas, steam and air conditioning sectors achieve 2.4% growth in March. With the UK posting some fantastic figures of late, the Pound continues to look strong into the month, with it attempting to test most major resistance levels within its range. Unfortunately however, with a smooth recovery not assured, we still propose risk is to the downside.
Over in Europe, The government of Slovenia has announced a package of measures which it hopes will help it avoid an EU bailout. The measures include a tax rise, a major restructuring of Slovenia's crippled banking sector, and a programme of mass privatisation. This comes as Slovenia's mostly state-owned banking sector is suffering from mounting bad debts, whilst the government has struggled to find liquidity in the sovereign bond market. Its situation was not helped, as ratings agency Moody’s dealt the government a further blow last week when it cut Slovenia's bonds to "junk" status. It did however, manage to raise EUR 3.5 billion from the bond market last week, which is widely thought to have bought them some time. The package of measures was announced by Slovenia's recently installed Prime Minister, Alenka Bratusek, and her Finance Minister, Uros Cufer, who are desperate to avoid becoming the latest in a strong of EU countries to seek a bailout from European authorities.
GBP This Week
Another quiet week for the UK, with only a handful of events expected to bring about any potential effect on the markets, all of which are due out on Wednesday. The most important of these is the headline unemployment rate, alongside the Claimant Count figures. The claimant count is expected to show a more moderate reduction of -3.1K compared with March where the number of claimants fell by a staggering -7K. Recently, forecasts have been slightly on the negative side, prompting some decent Sterling gains on the back of these releases, so we expect this release to come in slightly higher than expectations. Moving to the Unemployment rate, we expect the level to remain flat at 7.9%, however any surprise reduction in this rate would give Sterling even more of a boost.
The markets continue to seem bearish on the prospects of the British economy. This was underscored by the fact that a positive British Manufacturing Production figure (which in my mind was considerably positive for the UK outlook) failed to prop up the pound, which took a tumble later in the week against a mighty Dollar. If this is a trend of things to come, we could see the Pound move closer to the 1.50 level, especially if US numbers look sharp. GBP/EUR is harder to project, as both regions continue to struggle in the current climate. There is significant resistance in the 1.19 level which Sterling has found hard to break, and should we see some solid European GDP figures this week, we believe that the risk continues to the downside.
USD This Week
In contrast to the UK, the US has a busy week on the economic front, with a number of key events due to be released. The main drivers of market action are likely to be focused on the sentiment based figures, so we are particularly interested in this week’s Philly Fed Manufacturing Index and the UoM Consumer Sentiment releases, both of which are out in the latter part of the week. Thursday’s Philly Fed manufacturing index sees the market expecting an increase from 1.3 to 2.5, which in itself would provide very little positive gains for the Dollar. In reality however, we very rarely see market expectation play true in there economic times, and therefore should this figure miss expectation, expect some significant volatility. Moving to Friday’s University of Michigan Consumer Sentiment, we expect the index to rise to 77.9 from 76.4, indicating a boost for the prospects of retail within the country. The previous 4 releases have been poor however, therefore we are looking for a contraction pushing the index closer to the 74’s. We will also be watching April Retail Sales, PPI and Core CPI figures from the US this week.
In the US, the better than expected jobless claims last week added a lot of optimism, in addition to the Non-Farm Payrolls. In addition, the political head-winds are now on hold, as better than expected tax revenue defers the debt ceiling issues plaguing the senate. With this in mind, we should be in for a strong Dollar as we move into the week.
EUR This Week
A quiet week for the Eurozone, with most eyes focused on the German ZEW economic sentiment figure set to be released on Tuesday. We expect the index to post a strong gain this month, potentially approaching the 27’s from its current level at 24.9. Looking at the previous results, the previous 6 out of 8 readings have been significantly better than forecast so we continue to back the positive trend being set. Moving to Wednesday, we look forward to a raft of GDP releases for Eurozone member states, with French, German, Italian and Eurozone data proving to be the highlight. Most notably the German and Eurozone releases could see a shift back into positive growth, which would likely bring about a significant response from the market.
Mario Draghi continued to hint of the prospect of negative rates, which continues to weigh on the Euro despite improvement in German numbers. Also, while the Japanese QE blitz also sends money into Europe, it sends more money to the US. With this in mind, EUR/USD is likely to remain under pressure this week, with the Euro struggling to make gains.
In Other News
Good old Fergy, or should I day, Sir Alex Ferguson marked his final match as manager of Manchester United at Old Trafford by lifting the Premier League trophy. The Red Devils secured the crown with a victory of Aston Villa back in April, however collected the trophy after Saturday’s 2-1 crushing against Swansea. We now say goodbye to the lovable Scot, who has quite probably been the most influential manager of all time. David Moyes definitely has some very big boots to fill on this one!
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