Green shoots, dikes and fingers

Jumping on the recovery bandwagon

Well, the yen went exactly nowhere over the week much as expected.

April machinery orders, the core of Japan’s export performance was down by 5.4 percent while the Q1 GDP was confirmed as down 14.2 percent over the year but the market felt comforted that it was better than expected.

That’s nice of them.

So much so - as the rest of the world began to talk about green shoots in the economy equity markets rose across the world and even the Nikkei 225 ended the week above 10,000. G8 observed that the larger industrialized economies had begun to stabilize but had not been able to shake off the attendant risks.

Perhaps the green shoots came with such relief that Real Madrid decided they’d spend 80 million pounds on one player. Most soccer clubs aren’t even worth that much. Has the world really gone crazy?


But have we really turned the corner? It’s far too soon to say. It can hardly come as a surprise that we’re seeing better numbers given the amount of money that the world’s governments have thrown at the economy. But it has its limit. What is more critical is that economies begin to support themselves and that means consumers will carry on spending.

That will be the big test. Everyone knows that employment numbers drag the economy – both into a slowdown but also into growth. There is still a large degree of negative equity in property, unemployment is growing fast and values of pensions have been hit very hard. It's going to take a lot to turn that negative sentiment into positive...

It is too early to say, but the risks of today’s leveraged markets, and come to that government spending, are still very evident. After 27 years working in markets it is very clear that leverage causes extreme reactions. Personally I’m not convinced that the level of abuse of derivatives and leverage are going to be cured in one of two years…

One does wonder if the huge amount that governments have spent is akin to putting a finger in the dike.

However, the market has decided that the worst is over in the States and that Europe is going to suffer more. Hence the dollar has been firm – more against the European currencies than the yen – and this is likely to continue to the end of next month at least and although the dollar may soften into August/September according to my cycles the coming year does look like seeing a strong dollar.

Given that the mess in Europe has not been discounted as much as here in Japan the risk is that the yen will begin to strengthen against the European currencies at some point and that means it will probably perform relatively better against the dollar.

There are signs that we could see the dollar a little higher against the yen over the next week, but I’m not convinced this is going to continue.

So, expect the yen’s value to remain soft against the dollar for a while – but unless it gets beyond the 101.43 level again I feel there are signs of a strengthening in the yen in the air.

Ian Copsey


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