Monday May 10, 2004 - 11:48:00 GMT
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FX strategy Session-- NY Open
In our Friday NY open report. We cited four reasons for a loss of confidence in the yen. They were: rising oil prices, higher rates abroad, a topping of Japanese equity markets and concerns about demand from a cooling Chinese economy. Monday was the first opportunity for Japan to react to the stronger than expected U.S. April Jobs report and the yen has been hit hard. Local fund managers are said to be looking overseas now for better returns with yields on bonds up substantially abroad and foreign investors in Japanese equities now worried about the impact of rising oil prices on the economy.
The Nikkei and yen are off sharply today. We wonder if this is an overreaction to oil, because Japan has been very successful in insulating itself from oil shocks. Rising interest rates abroad are another issue. Also, our best guess is that the Ministry of Finance at some point (above 115.00?) could start to disgorge some of its billions in excess dollar reserves. Another issue is when rising oil prices/tight supplies will start to impact the Chinese economy. Nevertheless the yen still looks vulnerable.
Equity markets elsewhere are faring no better. U.S. markets have now penciled in a Fed rate hike for June 30 from August 10. It is not the timing of the initial 25bp hike that matters to investors; it’s the size and timing of the sequence of rate adjustments that come subsequently. Some see short term rates up 100 bp by the yearend period and many perceive that 3-1/2% now represents monetary “neutrality” for the Federal Reserve. In this regard, once the markets sense that employment growth is secure, they will start to focus on inflation. The same goes for the Fed. Rising interest rate should help the dollar, although soft equities are a major concern.
Stock prices in Europe have been hit hard today by concerns about energy prices and supply and the risk of a premature (for Europe) rise in global interest rates. Like it our not, global debt and equity markets have become unified to a lage degree. The current environment could prove stressful for the euro.
The “commodity currencies” (AUD, CAD, NZD) have been hit hard today on concerns about the potential for falling commodity prices as demand cools and the cost of carry rises. We are not comfortable about lumping these three together nor is the logic of the trade unassailable. Nevertheless the Aussie$ is through the .70 line and $/cad is approaching 1.40.
No key data are set for release from the U.S. today, although Chicago Fed Pres Moskow will speak at 14:30 GMT. Tuesday sees no major U.S. data, but German trade is due and EcoFin meets in Brussels, plus U.K. Industrial Output is due. Wednesday sees the BOE inflation report and U.S. trade.
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