The Overnight Report: A World Of Currency Confusion

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By Greg Peel

The Dow rose 46 points, or 0.3% to 14,018, while the S&P was up 0.2% to 1519, but the Nasdaq fell 0.2%.

It was another day of not much happening on Wall Street last night, yet still the Dow managed to post a new post-GFC intraday high at 14,038 before easing off, but still holding above 14k. While many commentators still talk of the pullback that must come, others are very bullish for 2013, suggesting any pullbacks will be (a) minor and (b) great buying opportunities. As I have noted before, nothing ever happens in financial markets because it is expected to.

Of note was an earnings report from Coca-Cola (Dow), which disappointed due to weaker than expected sales in Europe and China. On the other hand, Treasury data showed the US posted a rare budget surplus in January, which represents the first monthly surplus under Obama ahead of potentially the smallest annual budget deficit to be posted in his tenure.

Meanwhile, the Australian indices are slipping into a pattern of taking a run at higher levels from the open before fading as the session wears on. Yesterday the All Ords did indeed breach 5000 – momentarily – before slipping back again. As noted yesterday, the real excitement will come when the ASX 200 can close the final 40-odd point gap to its own 5000 barrier.

It is as if both markets, US and Australian, are camped outside the castles of their resistance levels, laying siege and making several efforts to break in. Each failure to penetrate the walls leads to a pause before the next assault. But the troops are wondering how long they can keep this up before the need to retreat will become obvious, allowing for a regrouping and the organisation of a more robust assault at a later stage. At the moment the troops are still willing, but at some point they will become weary.

The real action last night was in the real “war” – the Currency War that is – sparked by a statement issued by the G7. As was anticipated yesterday, the statement confirmed the G7’s “longstanding commitment to market-determined exchange rates and to consult closely in regard to actions in foreign exchange markets”.

Read in isolation, this statement could be interpreted as “we won’t intervene directly into exchange rates, but rather let the markets do their thing”. This would be an interesting interpretation, given the need to issue a statement has come about due to the violent plunge in the value of the yen at a speed that has shocked the Japanese government, let alone anyone else. Yet when the statement hit the wires, the yen collapsed once more.

Cooler heads suggested the statement was poorly worded. An unnamed G7 official, having noticed the yen heading in completely the opposite direction to that intended, subsequently came out and cried “you’re misinterpreting!” What traders should have focused on was the line suggesting that G7 fiscal and monetary policies “have been and will remain oriented toward meeting our respective domestic objectives using domestic instruments, and that we will not target exchange rates”.

Confused? So was the rest of the world. But on clarification the yen turned on a dime and started flying back in the other direction. What the statement is trying to suggest (and clearly Japan is the centre of attention) is that G7 members will implement policies aimed at reflating their economies which, only as an indirect consequence, will devalue exchange rates. They will not attempt to directly influence exchange rates.

All very subtle, but it is also interesting that the US has effectively endorsed Japan’s attempts to shock its economy back into life. It’s a bit hard for the US to quibble really, since that’s exactly what the Fed is doing and has been doing since 2009. The G7 members must at least appreciate that a spiral of competitive devaluation can only end in tears, and is ineffective without some sort of coordination. This may be all we can take out of the G7 ramblings for now, ahead of the G20 finance ministers meeting in Moscow beginning Friday.

One of the few nations remaining “neutral” in this Currency War, Australia (and ironically Switzerland is in it up to its ears), has seen its currency jump 0.3% since yesterday to US$1.303 as the US dollar index has fallen 0.4% to 80.08. The US dollar fell a percent against the yen. The Aussie gleaned some upside from a slightly more positive NAB business survey than in January but at the end of the day, the Australian currency is little more than collateral damage, one way or the other, in this Currency War.

The weaker greenback meant base metals ticked up slightly last night as did the oils, with Brent up US25c to US$118.38/bbl and West Texas up US43c to US$97.46/bbl. Gold rose slightly to US$1650.70/oz.

The SPI Overnight rose 5 points.

We are awaiting President Obama's State of the Union address this morning Sydney time. Tonight the US will release January retail sales data, which will be the first to reflect the payroll tax hike. Westpac ((WBC)) will release its consumer confidence survey locally, but the feature today will be a long list of earnings report highlights.

Reporters include Ansell ((ANN)), Boral ((BLD)), CommBank ((CBA)), Computershare ((CPU)), CSL ((CSL)), Leighton ((LEI)), OZ Minerals ((OZL)), Stockland ((SGP)) and WorleyParsons ((WOR)), among many more.

 

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