From a longer-term perspective, overall confidence in the economy and government-debt situation will remain extremely fragile as the situation remains perilous. The Bank of Japan will maintain an extremely loose monetary policy to support demand which will hurt the yen. Global risk considerations will also remain important and the yen will gain support when there is a sharp deterioration in confidence and heavy stock-market falls. Nevertheless, the yen will find it difficult to sustain gains given underlying vulnerability.
The dollar and yen gained support from a fresh deterioration in risk appetite and a move into more defensive currencies as commodities came under fresh selling pressure. The dollar was blocked in the 81.30 area and had a slightly weaker tone even though it did find support close to 80.50 in choppy trading conditions.
The latest Japanese current account data recorded a sharp decline in the surplus to JPY240bn for March from JPY723bn previously as exports declined. The underlying balance of payments position will remain weaker in the near term and this will tend to undermine the yen.
The yen also continued to gain support from vulnerability in global equity markets and weakness in commodity prices with further pressure for a reduction in commodity-related carry trades funded through the Japanese currency.
There was still a lack of confidence in the Japanese fundamentals which limited yen buying with expectations that the Bank of Japan would need to maintain a highly-expansionary monetary policy at next week’s policy meeting. The dollar maintained a more fragile tone in Asia on Friday with a retreat to near 80.50.
Sterling:
The Bank of England is looking for an opportunity to increase interest rates to curb inflationary pressure, but there will be further major concerns over the growth outlook as spending remains under pressure and there will also be fears that the banking sector will not be strong enough to cope with higher borrowing costs. In this environment, underlying confidence in the economy and Sterling is likely to be weak. There will still be an important element of protection from weak fundamentals in other key economies, but Sterling will find it difficult to make much headway.
As expected, GDP growth forecasts were downgraded in the Bank of England quarterly inflation report and the bank also warned over the outlook for consumer spending as real incomes continued to decline. The bank, also raised its inflation forecasts with the headline rate set to rise to over 5.0% as energy costs rise.
In his press conference following the report, Bank Governor King warned that interest rates would eventually need to rise and the inflation report was consistent with rates rising slightly in the third quarter of 2011. King, however, also warned that weakness within the banking sector would lessen the scope for higher rates and there were very important concerns surrounding the economy.
The report provided immediate support for Sterling on a revision to interest rate expectations, but the currency will find it more difficult to gain sustained support given the downbeat assessment. From a peak above 1.65 against the dollar, the currency retreated to lows below 1.6250 and failed to sustain gains beyond 0.87 against the Euro.
The RICS house-price index improved slightly to -21% for April from -23% previously which was a 10-month high for the index even though it remained in negative territory. Underlying confidence in the housing sector remained fragile, especially with the Halifax house-price index dropping 1.4% for April.
Economic data later in the week did not provide any support with a weaker than expected 0.3% increase in industrial production for March following a 1.2% decline the previous month. The latest monthly NIESR GDP data also recorded weaker than expected growth of 0.3% for April from a downwardly-revised 0.5% previously which does not suggest that the economy has been able to gain any momentum. |