March 18, 2011

Market Wrap For The Week Ending 18-Mar-2011

Weekly Snapshot
• Japan's benchmark Nikkei average fell 6.18% to close at 9,620.49 on Monday (Reuters)
• Japan's Nikkei stock index nose-dived another 10.55% on Tuesday (AP)
• The Federal Reserve maintained its ultra-loose monetary policy on Tuesday (Reuters)
• Japanese stocks regained some losses. The Nikkei bounced back +5.7% on Wednesday (Reuters)
• Euro area annual inflation was 2.4% in February, up from 2.3% in January (Eurostat)
• The U.S. current-account deficit decreased to $113.3Bn, or 3.1% of GDP in Q4 of 2010 (ESA)
• U.S. wholesale prices rise 1.6% due to biggest jump in food costs in more than 36 years (AP)
• Japanese Yen rises to all-time high against the US Dollar on Wednesday (Reuters)
• The Bank of Japan was pumping 3 trn yen ($37.5 billion) into money markets on Friday (AP)
• Swiss Franc rises to all-time high against the US Dollar at 0.8860 on Thursday (AP)
• Yen slides on Friday after G7 nations coordinate intervention in forex market (Reuters)
• The Libyan government announced a cease-fire after UN resolution on no-fly zone (AP)

Market Barometers

st-2011-0318   fx-2011-0318

Chart Of The Week
Crude Oil prices have been on a bull run ever since the early part of 2009.  The recent political crises in the Middle East only put more pressure on prices.  Libya’s oil production, averaging about 1.3 millions barrels per day, essentially came to a stand-still through the escalation of conflicts.  That put oil prices on a clear path towards levels above $100 per barrel.  After the UN security council issued a resolution for a non-fly zone in Libya, oil prices had a sharp drop on Friday.  For now the price of oil is hovering just above $101 but it remains to be seen if this will keep a lid on prices.

Oil-Libya cease fire

Japan Needs A Break  
As if the human toll and suffering was not tragic enough, Japan also had to endure economic and financial strains unmatched in recent history.  At the beginning of the week, Japanese stocks saw a decline of over 16% within two days. Counter-intuitive to that decline, the Japanese Yen rose to an all-time high against the US Dollar on Wednesday. We examined the initial reaction in the currency markets right after the Japanese Earthquake hit last week.  The rationale for the strength of the Japanese currency was seen in anticipation of massive repatriation of Japanese investment funds from overseas.  On Wednesday,  the US Dollar dropped 300 points within a matter of 15 minutes, only to pull back to where it had started from.  Clearly a speculative attack that prompted a fall below a major technical support level for the US$ versus Yen.   It may have been the ongoing strength or that hard-hitting speculative run on the yen but Japan clearly needed a break.  That break came courtesy of an emergency meeting when the central bankers of the G7 nations agreed on a coordinated intervention in the currency markets.

Yen-G7 Intervention

Currency interventions have a mixed record when it comes to pushing against market forces. As the Financial Times report The G7 and the Yen notes:

The history of currency interventions suggests that solitary action is not enough. In mid-September, for example, when the BoJ went it alone, the sale of ¥2,125bn($26bn) (the biggest-ever one-day intervention) reversed the yen’s appreciation trend only briefly.

Coordinated efforts by numerous central banks have a better chance of being successful in stemming against market forces and slowing down currency trends. However, reversing a trend through interventions even on a scale of some $20 billion may only put a dent in a market that has a combined turnover of several trillion dollars per day (counting all currency transactions). As in past interventions, typically trend-following hedge funds may play the role of the counter-part to Central banks’ efforts.  This week, a long-standing support level at ¥79.75 has been broken.  You have to go back all the way to 1995 when the Yen had its previous record against the US Dollar.  Incidentally, that record occurred a few months after the (in)famous Kobe Earthquake which happened on January 17, 1995.


History may or may not repeat itself.  It looks though as if some large speculators have been placing their bets on an ongoing Yen strength, despite the threat of currency intervention.  For now the Yen strength has been put to a temporary halt.  The week-end may present some additional impetus in the form of official G7 support statements and/or additional efforts by the major central banks.  I sure hope that Japan’s nuclear threat can be contained so that the healing and re-construction efforts can begin in the devastated regions.  Japan really does need a break and so does its capital market.

A Quiet Currency Record  
s the world’s attention was glued to Japan, another low-yielding currency has made a near identical movement against the US Dollar recently.  The Swiss Franc, also a traditional safe-haven currency, has quietly made its way to successive new records against the US Dollar. On March 17, the Swissie reached an all-time record of 0.8860 against the greenback.

USD-CHF Monthly Chart

In view of this, the repatriation of funds as a rationale for the recent Yen strength may be just part of the explanation of the Yen’s appreciation.  The sad events in Japan only accelerated a trend that has already been there for a long time.  It does, however, raise another question: Is the Japanese Yen really that strong or is the US Dollar showing continued signs of losing more of its safe-haven status?

Good luck and good investing!

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