Friday April 30, 2010

Demand for the Japanese yen fell across the board on Friday as the Bank of Japan raised its economic outlook. The drop in the value of the yen came at a time when fast-paced tri-partite discussions aimed at providing a lasting solution to the budget problems facing Greece appear to be heading for a weekend conclusion. Confidence of a positive outcome helped lift the euro at the expense of the dollar and the yen, given their usual roles as havens from fear.

Japanese yen -The Bank of Japan in its semi-annual Outlook for Economic Activity and Prices said the economy was accelerating and should leave deflationary pressures behind by 2011. It said the economy is expected to return to a sustainable growth path with price stability in the longer term. The Bank of Japan now believes the economy will grow 0.2% this year but that GDP for 2011 will reach 1.8% and accelerate further to 2% by 2012. Citing gains for household consumption, consumer confidence and industrial production the central bank clearly sounds more upbeat about the prospects.

The clash between raging financial market volatility caused by an escalation of fears that the Greek debt spiral would impact other European governments and the ongoing recovery in far-reaching parts of the world has caused indigestion for the yen. But the trend is becoming clearer especially as dealers sold it heavily in light of improvements on both fronts today. In other domestic news Japanese statistics reflected a 71.2% annual pace of change in vehicle production, an improvement in housing starts and a 42.3% jump in construction orders. A further sign of regional improvement was evident in a 22.1% annual gain in South Korean factory output.

The yen has slipped further in North American trading against the dollar to stand at ¥94.44 while it's ending the week at ¥126.78 per euro. Against the Australian unit it is close to ¥88.00, while the pound buys ¥144.51.

Euro - When the world first heard about the €30 billion rescues contribution coming from EU partners in conjunction with €15 billion from the IMF, the numbers appeared significant to do the trick. A German attempt to squeeze blood from a stone appears to have significantly raised the stakes. In an effort to make the Greek nation realize that Germans are dead set against any bailout it has trashed the idea of financial assistance without further deep austerity measures. If media stories are correct, the hardball game has worked. We could hear over the weekend that a new €120 billion package has been agreed upon that would be linked to further and increasingly unpopular domestic austerity moves amounting to €24 billion, which almost matches the initial rescue contribution from the EU. Tough love perhaps?

EU President Barruso predicted it would be perhaps only days before a solution might be announced, which would coincide with the conclusion of IMF and Greek talks on Sunday. Once again Mr. Barruso predicted the negotiations involving the IMF, ECB and EU did not involve any debt restructuring and that they were progressing at a rapid-fire pace. The positive developments and fast approach of the weekend provided support for the euro, which has gained a penny overnight to stand at $1.3332. Dealers don't want to get caught short at the start of the week if a resolution is paved that would involve larger sums and allow the payments to be delivered in time to replace maturing Greek government debts.

U.S. Dollar - The dollar index remains lower despite gains against the Swiss franc and Japanese yen on account of its loss to the euro. First quarter GDP came in a shade weaker than expected. But still, a 3.2% annualized gain can't be laughed at as the economy regains its footing.

Aussie dollar - Investors continue to discount the Greek story and whether it has any implications as far as the Far East. The dollar is trading at 93.20 U.S. cents and its highest in over a week as investors shrug off Eurozone worries favoring to focus on the potential for another interest rate rise on Tuesday from the RBA.

Canadian dollar - Gold and crude oil price rise are leading commodities higher, which is positive for the Canadian dollar. The loonie is, however, now unchanged at 99.35 U.S. cents following in-line data for GDP. The economy expanded for the sixth month in a row in February boosted by gains in manufacturing and spending related to the Vancouver Winter Olympics.

British pound - The third and final televised political debate was won by Conservative party leader David Cameron at least according to three instant polls immediately after the event. The outcome encouraged investors that a majority government could still happen after all next week. The pound was stable in the aftermath but investors apparently keep suffering from bouts of mild amnesia and have let the pound slide to $1.5310 having leapt to $1.5387 earlier in the day. Consumer confidence in April slipped to a three-month low according to a GfK survey, but this is unlikely to be a major driver with the election bearing down on voters next week.

Andrew Wilkinson Senior Market Analyst