Friday April 24, 2009

One can understand how a better reading of business confidence across several thousand German businessmen could help drive the euro to a second day of gains against the dollar, but to understand the strength of the pound on a worsening shrinkage of growth leads us to conclude that the all round weaker dollar must be the culprit. A higher ZEW reading of German business leaders saw confidence come back from a 26-year low helping lift the euro to $1.3257. The pound rebounded from weakness following the worst GDP report in two decades and currently stands at $1.4710. The dollar index has fallen 0.81 to 84.95 on the June future for a near 1% daily decline.

Possibly behind today’s dollar demise is the fact that global bourses are higher following the positive European data. Equity bears have had the hardest time this week gaining any traction. The simple fact is that the forthcoming stress tests across the nation’s biggest banks and whose methodology is to be announced this afternoon, isn’t causing enough fear about the bank’s future health.

Analysts at KBW yesterday predicted the need to raise a further $1 trillion in capital amongst the banks to cushion against losses from loans gone bad. We feel compelled to point to the equity market’s ability to take not just this analysis, but also recent IMF and OECD data firmly in its stride and see sunny skies and sandy beaches on the horizon.

The Japanese yen is stronger today certainly against the dollar at ¥97.36 first of all on the dollar weakness story, but in addition on a widely reported story appearing in the English version of the Nikkei newspaper. The paper says that the Japanese Financial Services Agency has clamped down on forex companies ability to provide leverage to their customers. Customers can typically trade from 100-600 times the notional value of their nominal cash sum. Apparently, the FSA is reducing this to 20-30 times. The story has created a rush of blood to the head and forced a rash of short-covering in yen. We’re wondering why this apparent regulatory move is needed. On the one hand the ability to leverage has proven dangerous and indeed is the root cause of current global turmoil, but on the other, why would the FSA want to introduce a measure that would strengthen the yen? Perhaps that’s simply not their motivation and at stake here is investor protection.

What’s needed is a weaker yen and perhaps after the April 13 ¥15.4 trillion fiscal stimulus package from Prime Minister Aso’s government, that might be in the works. Economists have played heavily on the slowdown in the rate of export decline after this week’s data. But with the spending package underway hopes are for a gradual lift in economic sentiment that would further reduce the need to seek refuge in the safety of the Japanese yen. A weaker yen could conceivably contribute to fresh export growth and aid an economic recovery.