Good morning and welcome to today’s foreign exchange market commentary on Thursday, the 14th of February.
By announcing that he will step down on March 19, three weeks earlier than scheduled, The BoJ Governor Masaaki Shirakawa sent out a clear message. With three new members in its nine-member governing board and a change in political leadership in Tokyo, the Bank of Japan is serious about printing money to buy domestic and foreign bonds in order to achieve its stated two-percent inflation target.
The result is for every body to see. The yen has witnessed sharp depreciation and is expected to continue on the downhill path. The issue is expected to dominate the discussions of the G-20 meeting of finance ministers and central bankers when they meet in Moscow on February 15. The currency issue is also expected to come up during Abe’s Feb 20-24 US visit.
Japanese PM Shinzo Abe has taken a two-pronged approach to shock the economy out of the deflationary stupor. Apart from pressing the BoJ to boost inflation, Abe has initiated a huge public works program amounting to 2.6 percent of GDP. This is expected to boost government spending and bond issuance significantly.
Abe has made no attempts to suppress the fact that the aim of BoJ’s money printing and foreign bond purchases is to debase the yen in order to make Japanese goods more competitive globally. His attempt to boost domestic demand by investing in big-ticket infrastructure projects is likely to blunt criticism from Japan’s trading partners, including the US. Tokyo may argue such a measure will save the economy from total collapse, something that doesn’t help the US either. A weak yen policy that stimulates a 3 percent nominal growth is better than a strong yen with a stagnant deflationary economy, Abe could argue. Stock markets, which are forward looking, seem to have accepted Abe’s argument. The Nikkei has jumped 25 percent to over 11,000 from a low of about 8200 last fall.
Japan’s new monetary policy is aggressively inflationary. It can hold nominal interest rates at current levels during the first year of operation. As deflation ebbs and prices and growth start to pick up, heavy bond purchases by the BoJ can keep interest rates low, further stimulating growth. Maintaining nominal growth of three percent while holding 5-year interest rates at 0.2 percent can bring down the debt-to-GDP ratio by 2.8 percent every year. To get the economy back on the path to growth, Shinzo Abe should pursue the current expansionary fiscal and monetary policies with renewed vigour.
CURRENCY RATES OVERVIEW
GBP/EURO – 1.1588
GBP/US$ – 1.5526
GBP/CHF – 1.4272
GBP/CAN$ – 1.5530
GBP/AUS$ – 1.4984
GBP/ZAR – 13.7620
GBP/JPY – 144.98
GBP/HKD – 12.0164
GBP/NZD – 1.8275
GBP/SEK – 9.7804
EUR: The euro slipped against most of its trading rivals in early trade yesterday after data released by Portugal showed the country’s unemployment rate has surged to the highest level in the country’s history. However, sentiments improved later after December industrial production in the euro-area came in better than expected, suggesting the economic recession in the region is easing. We have the euro-area wide flash GDP data coming out today, which will give more clues on the state of the eurozone recession. The region is expected to show an overall contraction of 0.4 percent while Germany, Europe’s largest economy, is expected to contract 0.5 percent. Euro could face downward pressure if the preliminary GDP reading falls short of expectations and the GBP/EUR pair could stage a rally up towards 1.16.
USD: Cable witnessed sharp decline yesterday after the Bank of England cut growth forecasts for the next 12 months to 1.7 percent from 2 percent for the UK in its quarterly inflation report and hinted at more monetary easing in future. Sterling fell to an intra-day low of $1.5522 after the BoE report revealed inflation could reach 3 percent this summer. Inflation is expected to stay above the targeted 2 percent until early 2016; the report warned, adding GDP growth is expected to stay below its 2007 pre-crisis level until 2015, the report said. The cable however recovered to 1.5537 in late trading compared to 1.5652 on Tuesday. The US dollar however weakened against most of its peers yesterday after retail sales rose by a paltry 0.1 percent in January, indicating the rise in payroll tax has started to affect consumer spending. We have the weekly unemployment claims data coming out today while another member of the FOMC addresses the media from the other side of the Atlantic.
Have a great day!