There will be near-term yen support from capital repatriation and there will also be yen support when wider global risk appetite deteriorates, especially if there are fears over a sharp slowdown in Asian growth rates. Yield trends will remain important and the yen will be undermined by higher US yields. There will also be further unease over the domestic debt situation with expectations of long-term yen depreciation. In this context, any yen gains are unlikely to be sustained.
The dollar found support below the 82 level against the yen during the week and advanced to near 2011 highs just above 83.50.
There were further reports of export selling towards the 83 level and there was also evidence of capital repatriation back to Japan which underpinned the yen and also curbed speculative dollar buying.
There were comments from a Moody’s analyst warning over the negative consequences if there is no fiscal reform by Japan, although there were also comments that the country was still a long way from a crisis situation.
Domestically, there was also a rise in machinery orders for the first time in three months, but the 1.5% gain was lower than expected and confidence in the economy will remain fragile even with the Bank of Japan taking a slightly more optimistic tone.
Sterling:
Inflation and growth trends will continue to be watched very closely in the short-term. There will be additional pressure on the Bank of England to raise interest rates if the headline rate rise again. The central bank’s decision not to increase rates this month will, however, also be seen as a tacit admission that the underlying economy is weak. The overall policy mix will tend to remain a tight fiscal stance and loose monetary stance which will tend to limit Sterling support. Weaknesses in other key economies will be important in stemming selling pressure on the UK currency with high volatility likely to remain the key feature.
Sterling was subjected to choppy trading during the week and there was a slight net decline against the US currency even though it held above 1.60.
The government announced a GBP0.8bn increase in the 2011 banking sector levy which had a negative Sterling impact, especially as there was a stock-market retreat.
As far as the economic data is concerned, there was a modest improvement in the RICS house-price index to -31% for January from -39% while the BRC retail sales report recorded 2.3% annual sales growth and shop-price inflation rose. The trade data was weaker than expected with an increase in the goods deficit to a record high of GBP9.2bn. There was a suspicion that the data had been distorted by adverse weather conditions, but the underlying trend will continue to give cause for concern.
The Bank of England left interest rates on hold at 0.50% which had been the expected outcome despite speculation that there could be an increase. There was no statement with the decision and the vote breakdown was also not known. Sterling dipped briefly following the announcement, but recovered ground quickly on the assumption that the bank would increase rates within the next three months. The quarterly inflation report will be watched very closely next week for further growth and inflation evidence.
Given the deteriorating inflation outlook, there will be market fears that the Bank of England is expecting the economy to weaken further in the near term and this is likely to cap any Sterling gains. There was also a weak NIESR monthly GDP estimate which will have some negative impact on sentiment. |