Yen resumes downturn
With U.S markets closed for the President's Day public holiday, liquidity was suitably lighter than usual overnight, and for the most part, the balance fell in favor of the greenback with moderate gains noted across the board.
The Bank of Japan unexpectedly increased the size of its asset purchases by ¥10 trillion ($126.7 billion) to about ¥80 trillion. And it said it would make those purchases through the end of 2013, a six-month extension.
True to form, the most pronounced moves came from the Yen which resumed its south bound trajectory following the official G-20 statement released over the weekend. World leaders from the top 20 nations globally vowed to refrain from using currency devaluation as a means to gain a competitive edge, but failed to specifically target Japan in what many believe is a direct attempt resuscitate their economy by encouraging currency weakness. In short, the status quo has been maintained - Japan has a license to continuing printing under the category of economic stimulus.
The USD-JPY rate led the way with a break of Y94-figure once against for the first time since early last week and remains just shy of the figure around Y93.95. We saw a similar theme of Yen weakness across the board with the Kiwi, Aussie and Euro making respectable gains. The next major theme for Yen players is no doubt the change of governorship at the Bank of Japan, with Masaaki Shirakawa due to exit the top job on March 19, alongside two deputy governors.
The Abe government is expected to provide its recommendation by month-end, but three main contenders have emerged and all are considered pro-stimulus allies of the Abe administration.
- Asian Development Bank President Harukiko Kuroda
- Former Vice Finance Minister Toshiro Muto (Former BOJ deputy governor)
- President of the Japan Centre for Economic research Kazumasa Iwata (Former BOJ deputy governor)
The government's recommendations will need to pass both Diet chambers, which may be a challenge considering the LDP does not hold the majority in the upper house. We anticipate political conjecture to remain a key determinate of Yen direction with all three contenders likely to fuel further Yen weakness should markets perceive a strong chance Abe's nominee will be successful.
Aussie looks to RBA for direction
While the Aussie dollar followed the pack overnight in making respectable gains against the Yen, for the most part demand for high-beta currencies was moderate at best. The local unit remained capped below 103.15 US cent with little in the way of catalysts to encourage meaningful moves one way or the other. At the time of writing the local unit is trading just shy of 103 US cents, and we anticipate only moderate moves until the release of the RBA minutes at 11.30 AEDT this morning.
Local traders will focus on the RBA February meeting minutes release today for any insight that may further define the chances of a near-term rate cut. As of yesterday, interest rate futures implied a 31 percent chance Stevens and Co will slice 25bps off the cash rate in the March meeting, but many economists expect further policy easing to commence once the board is satisfied previous revisions to the cash rate have filtered through the economy. This may imply the bank will wait until the second-quarter should they perceive domestic conditions require further support.
The tone of the today's minutes should reflect a better outlook abroad with local growth remaining below trend. While keeping the cash rate on hold at 3-percent, the statement upgraded their view on global conditions, noting, the "downside risks appear to have abated," in reference to Europe and the United States, while growth in China has "stabilised at a fairly robust pace."
In essence, today's minutes should serve as a reminder the RBA stands ready to further support demand with additional interest rate cuts. Nonetheless, they - as always - will express the need to wait until previous cash rate reductions have filtered through the broader economy.
The bank has made it abundantly clear the peak in resource investment is approaching, In-turn placing the burden on other areas of the demand to take up the slack. Whether these other "areas of demand" do indeed fill the void remains to be seen, however the high exchange rate will continue to be seen as detriment to exporters, retailers and tourism related industry. Markets will be looking closely for the minutes to expand on the implications of the strong Australian dollar, with the statement simply noting "the exchange rate remains higher than might have been expected."