Wednesday, 25 February 2009

FX: Bullish USDJPY & other trends

  • USDJPY reversing gains. Japan is export driven economy & therefore sensitive to JPY. The more JPY rallies, the more the Japanese economy is likely to deteriorate (e.g. -12% GDP Jan & Jan exports -46% YoY) and the more likely the BoJ intervene, both of which make JPY less attractive.
  • The state of the US economy & the debt burden puts $ hegemony at risk in the long term. The US is a net borrower (current a/c deficit -5% GDP) and a net debtor (70% of GDP by 2010) while fiscal deficit -3.5% and rising. Moreover, the countries that fund the deficit are strategic rivals/ unstable petro-states and their reserves are being diverted to fixing their domestic economies. The US is vulnerable to the kindness of strangers.
  • A large part of $ safe haven status is technical, driven by flight to US Treasuries & countries/ companies that funded themselves in $ who can't refinance debt.
  • EUR: Asked whether Germany would risk seeing the Eurozone break up rather than take action if one of the member states could not refinance its debt, Peer Steinbr├╝ck, finance minister, told a press conference: “Could you imagine anyone would be willing to put up with this? We would have to take action.”
  • £ concerns overdone:
    1. public debt = 55% of GDP & 70% by 2010 but < 1916-1970
    2. UK not only country increase public debt:GDP ratio. UK's 70% of debt:GDP = Germany, < France/ US
    3. Nationalisation of banks risky but falling GBP offsets foreign liabilities on bank balance sheets
    4. UK default assumes inability of state to manage economy

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