European currencies lose ground against the Yen

The market has been bereft of any singularly influential event that could cause any substantial or decisive move in any direction over the past week. The Yen has continued to make modest gains in line with my basic view but not to any extent that has confirmed the more dramatic forecast of a large decline in the Dollar’s value against the Yen.

Looking specifically at the economic releases over the past week Japan has seen mixed numbers. The dire state of the manufacturing industry was confirmed through final industrial production and machine tool order figures for February but confidence numbers have appeared to stabilize. However, at the same time labor cuts were announced by Sony Ericsson and Toshiba which can hardly engender joy amongst workers.

Obama continues to bang the optimist’s drum in saying there are early signs of recovery. Indeed, regional Federal Reserve districts did report an improvement in industrial activity and the NAHB housing index rose by 5 points to +14.

Therefore, in general the market has become bullish towards the U.S. Dollar citing disarray in the EU which had only looked stable during the years of global growth. It also sees the U.S. more likely to recover sooner than Europe. Indeed, there is generally a 9-12 month lag in the economic cycle versus the U.S.

Personally I find the markets’ preoccupation with an economic recovery rather unusual. Asset prices have fallen and millions of householders now see their mortgage balance higher than the value of their home. Lending has become tighter which means that first time buyers have to put down a larger deposit and the multiple of income has dropped.

The combination of these two issues is going to rule out house moves until equity rises back above their mortgages and until householders feel more confident of their jobs they’re hardly likely to take on more risk. They are also more likely to keep household budgets on a tight rein – thus spending will remain low.

It is really difficult to see from where a sustainable recovery is going to come…

Last week the Dollar steadily rallied against the European currencies. This is in stark contrast to the performance against the Yen which over the week saw another new low in the Dollar’s value at 98.13. The recovery from there has been less than robust.

This presents an interesting contrast to the Dollar’s strength against the European currencies.

During the 2 months before the end of the Japanese fiscal year the Dollar led the way in its gains against the Yen as compared to European currencies.

Wherever I look in the market the forecasts are for the Dollar to rise to 110 once again based on the worst recession in over 65 years yet even with the Dollar now favored it does seem very strange that it has actually slipped against the Yen…

The cycle high has passed and so far, albeit gradually, the Dollar’s value against the Yen is slipping… It doesn’t have to get much further – in fact below 98.13 – to return to the 96.00 area over the course of the next week. This should provide a modest recovery but I feel it will struggle to get back above 98.00…

Ian Copsey

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