KUWAIT: Since the beginning of the year, the Japanese yen has been on every investor’s mind. Indeed, as the Japanese government continues to show their commitment to a weaker currency, European leaders on the other hand are starting to show concerns about the Yen and the negative effect it would have on European exports.
In the US, the recovery remains underway with jobless claims falling to a five years low this week. Equities also registered highest levels post the financial crisis, as the US House of Representatives passed a measure to postpone the debt ceiling deal by three month until May 19.
President Obama also did his share in offering hopes during the presidential inauguration speech, as he noted the US must remake the Government, revamp the tax code, and make some hard choices to reduce the cost of health care and the size of the deficit.
The good news continued during the week on the European side, after German Foreign Minister Guido Westerwelle said the euro-zone has left the worst of its debt crisis behind, but its countries cannot relax and have to continue their fiscal consolidation efforts.
Overall, the data as of late has showed an improving activity outlook for the Euro zone and the trend of growing balance of payments surpluses and falling budget deficits are structural and cyclical positives for the euro. The data out of Germany is leading the way and this could spill off into other countries as financial markets normalize and the reduced requirements for banks liquid asset holdings will allow banks greater capital to support trade finance. Market analysts are now talking about a recovery in cross border lending as confidence has started to return.
The euro ended the week outperforming across the board, especially against Asian currencies. The currency reached a high of 1.3479 against the dollar while registered an increase of almost 4% against the Japanese Yen.
The sterling pound on the other hand continued its underperformance after Bank of England Mervin King noted that a lower pound was beneficial for the UK’s economy rebalancing. The currency reached a low of 1.5746 against the dollar while it posted its lowest level for over a year against the Euro.
Unemployment claims
Initial jobless claims in the US dropped to its lowest level in five years last week. the data suggest a stronger labor market and economic growth despite persistent pessimism in the market. Initial jobless claims fell 5,000 to 330,000 in the week ended Jan 19 representing a 1.5% drop from the previous week 335,000. The data were significantly lower than the average estimate of analysts expecting 355,000.
Europe and UK
Looking at a year earlier, Europe was in a much worse situation than where it is today. After risks of a break-up have receded, Bundesbank chief Jens Weidmann warned against relying on the European Central Bank as the only crisis manager. Indeed, he was quoted telling a newspaper earlier this week that its bond buyback program was risky. According to him, “Central banks in recent years have been pulled into the role of a crisis manager.”. He also added, “The program can bring considerable risks to the monetary policy. Those risks now have to be limited and prevented”. Weidmann concluded that the greatest risk is that the cheaper financing takes away the incentive for fiscal reform.
The attention now turns over to Japan where European politicians have started criticizing publically the country, mentioning its engineering of a weaker yen and stirring a global currency war. The Japanese vice Finance Minister Takehiko Nakao replied that Japan has no intention whatsoever of competitive devaluation of the yen and the recent depreciation of the yen should be regarded as a correction from the one-sided and excessive appreciation that took place up to last year.
Divergence between German and French PMI Give an Unclear Picture of Europe
France’s manufacturing PMI was much weaker than expected in January, falling to 42.9 versus expectations of 44.98, and from 44.6 the month before. The number demonstrates that France’s manufacturing industry is shrinking at the fastest pace since the trough of the global financial crisis, in a new sign the Euro zone’s second biggest economy is in recession.
Germany’s manufacturing PMI on the other hand was stronger than expected at 48.8 versus expectations of 46.8, and up from 46 the month previously. The services PMI was also much stronger at 55.3 versus 52 consensus. The divergence between the French and German numbers was 6 points, but not unforeseen as similar divergences had occurred in the past as in 2010 and 2012, although they did not persist for more than 1-2 months. The composite Euro zone manufacturing PMI rose to 47.5 versus consensus 46.6. Given the strength in Germany and weakness in France were roughly offsetting, this suggested that the peripheral PMI numbers were better.
German IFO Beat Estimates while Mario Draghi Deliver Optimism in Davos
German IFO Business Climate rose from 102.4 in December to 104.2 in January, exceeding economists’ expectations of an increase to 103.0. On the other hand, IFO Current Assessment grew to 108.0 in January, versus 107.1 the previous month and above forecasts of 107.2. Finally, IFO Expectations climbed to 100.5 from 97.9 and slightly above expectations of 99.0.
According to the ECB president Mario Draghi, 2012 had effectively marked the re-launching of the Euro and repeated that financial stresses had eased, although the economy continues to lag.
UK recession
UK GDP shrank by 0.3% in the fourth quarter of 2102. The contraction, which was worse than most economists’ estimates, compared to a 0.9% rise in the previous three months. The statistics office also mentioned there was also some evidence of “fall back” following the Olympic Games in the third quarter. Industrial production fell 1.8%, while manufacturing dropped 1.5%. Construction output rose 0.3 %.
On Thursday, Britain’s Chancellor told reporters during the world economic forum in Davos that the government would stick to its austerity plan, despite criticism from the IMF.
China PMI better
China’s HSBC PMI was stronger than expected in January, rising to a two year high of 51.9 versus economists’ estimates of 51.7 and up from the previous month’s 51.5. HSBC said the sub-indices for output, new orders and employment are all now above the 50 level which indicates expansion. It seems that increased consumer demand is spurring manufacturers to expand production, while an expansion in railway building were also contributing.
Japan’s deputy economy minister said that a yen at 100 to the dollar would not be a problem, and argued that foreign criticism of Japanese monetary policy was unjustified. ‘Europe is in no position to criticize Japan’ Nishimura said, “Europe has brought about a prolonged weakness of the euro as a result of their own policies, while Japan has supported Europe through purchases of bonds”. Indeed, Japan’s largest mutual fund bought EFSF bonds for the first time since 2010.
On another front, Japan trade data was weaker than expected in December, with a deficit of JPY 801bn. While exports were beginning to recover, imports rose again, 1.2% m-o-m. Falls in exports to the US and China and imports of mineral fuels, contributed to a persistently high trade deficit in recent months.
Commodities
According to the first Deputy Chairman of the Russian Central Bank, Alexei Ulyukayev stated that the bank will continue to buy gold as it seeks to diversify its foreign reserves away from paper assets it views as risky.
The bank has also been a bullion buyer and the share of gold in its reserves is approaching a medium-term target of 10%, raising questions over whether it would keep buying gold. Ulyukayev, speaking during the World Economic Forum, said the central bank would continue to buy gold, but gave no indication on whether there would be any change in the share of its reserves it allocates to the precious metal.
In Europe, following on from a request by Germany’s Federal Court of Auditors last year to review its overseas gold holdings, the Bundesbank has indicated that it will begin a process to rebalance the distribution of its gold reserves. The bank stated that its gold will be repatriated (drawing down on stocks held in the US and in France). The Bundesbank wishes to increase its domestic gold holdings to 50% from 31% currently over the next six years or so.
Kuwait
Kuwaiti dinar at 0.28140
The USDKWD opened at 0.28140 yesterday morning.
NBK MONEY MARKETS REPORT
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Source Article from http://news.kuwaittimes.net/2013/01/27/currency-wars-seen-intensifying-in-2013/
