Mixed Message by the G7 on the Yen

N Korea tested its 3rd nuclear device. The move will anger China, N Korea’s main ally, who had urged N Korea not to do so. The US, South Korea and Japan have expressed serious concerns and some kind of sanctions by the UN Security Council is likely, which given its previous warnings, is likely to be supported by China;

Ms Lael Brainard, the senior US Treasury official responsible for international affairs, repeated that the US supported Japan’s policy to increase monetary stimulus, whilst warning against competitive devaluation policies.The market has taken these comments as a de facto approval of Japanese policies.

One of the favourites to take over as the next BoJ governor, Mr Haruhiko Kuroda, repeated  previous comments that Japan had to end its 2 decades of deflation. He advocated buying a wide range of Yen assets. Recent analyst reports suggest that Mr Kuroda is becoming the clear favourite for the job as the next BoJ governor. Mr Kuroda has made a number of comments which support the Japanese PM’s position.

The Japanese economy minister (Mr Amari) has suggested pursuing some policy (no details revealed) to increase the Nikkei to 13k, a rise of 17%, by the end of the current fiscal year ie 31st March  – I kid you not. Well, I’m off to the beach – no need for further research, hours of analysis etc, etc. Mr Amari is here to make us all rich !!!!

Japanese businessmen are concerned about a material weakness in the Yen, in particular the resulting cost of energy. They have suggested that Yen 95 to the US$ is far enough. Lets see if currency markets agree;

Indian industrial output declined unexpectedly by -0.6% Y/Y in December, as compared with a revised decline of -0.8% Y/Y in November and a forecast gain of +1.0%. Worryingly, India’s current account deficit (now being followed by the ratings agencies) is likely to be “significantly higher”, in the fiscal year ending 31st March 2013, as compared with last fiscal years -4.2%, according to the governor of the Indian Central Bank Mr Subbarao. A cut in India’s credit rating looks more and more likely. The Indian Rupee declined on the news;

There will be no further polls in Italy due to restrictions ahead of the upcoming general elections. It is clear that Mr Berlusconi has been successful in his attacks on Mr Monti and Mr Bersani, who have been slow to react to date. Mr Bersani’s party (centre-left) is still likely to gain the highest % of the votes, which under Italian election law will enable it to have a majority in the lower house. However, in the Upper house, Mr Berlusconi may just gain enough support to block policy initiatives, even if Mr Bersani enters into a coalition with Mr Monti. Its still just under 2 weeks to go, but this is getting messier and messier;

The French State auditor has advised that France is unlikely to hit its budget deficit target of 3.0% this year due to the weaker economy. The French have maintained that they will achieve their target – pretty close to impossible I would have thought.

The French December current a/c deficit came in at -E3.6bn, as opposed to -E3.5bn forecast and a revised -E2.8bn in November;

UK January inflation remained unchanged at +2.7% Y/Y, for the 4th consecutive month, and in line with forecasts. However, input prices soared by +1.3% in January M/M, or +1.8% Y/Y, mainly due to a sharp rise in the cost of oil and metals. Output prices rose by just +0.2% by comparison in January M/M, in line with estimates. The BoE is to release its inflation forecast next week, though had announced earlier that UK inflation would stay above the 2.0% threshold for the next 2 years. RPI rose to +3.3% in January, higher than the +3.1% in December;

Ms Janet Yellen, expected to take over from Mr Bernanke when he retires, repeated that a reduction in employment should remain the FED’s key goal, given the low level of inflation at present. Does not seem that she is backing off the Fed’s asset purchase programme, at all. Interestingly, she added that the impact of fiscal multipliers was greater than first thought (in Europe) and was making unemployment worse. Too true Ms Yellen;

Ahead of the G20 talks in Moscow later this week, G7 countries have reaffirmed their ‘commitments” to allow markets to decide on the relative value of their currencies and, in addition, agreed that individual countries central bank policy objectives will be focused solely on domestic objectives. That’s great, but as we all know, policies which impact domestic issues will have a currency impact. There has been a major “misinterpretation” as stated by G7 officials. They now state that there was concern about Japanese policies and, in addition, the Yen will be discussed at the G20;

Credit Suisse reports that inflows into mutual funds soared to US$38bn in January, the highest amount in 9 years. However, US$32bn also flowed into bond funds. The expected “great rotation”,  out of bonds and into equities has not really started, basically;



China remains closed for the New Year holidays. The Nikkei was +1.9% higher on the weaker Yen – given the very recent move, the Nikkei is likely to decline (materially?) tomorrow. European markets are higher. US futures suggest a flat open.

The Euro is strengthening yet again – currently US$1.3450. Peripheral EZ country spreads are narrowing. The Yen is bouncing around materially – currently at Yen 93.77 against the US$, following the statement by officials that the recent weakness of the Yen would be discussed at the G20, a drop of 100+ bips.

Spot gold is trading at US$1645, with April Brent at US$117.42, up yet again.

Will the sequester kick in on 1st March 2013. Until a few days ago, it looked like an odds on certainty. Its still the most likely outcome, but there is a feeling out there that some sort of deal may be possible.

Continue to build up my short positions in the mining sector, though will not increase further for the moment until I can get a better assessment of the US situation. President Obama’s State of the Union speech may offer some clues.


Kiron Sarkar
12th February 2013

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