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201703 Resource 128466 128654 128654 1208130163763 1208130163763 Controlled Asian Morning Update 14th April 2008

The G7 statement on currencies is inconclusive

European news from Friday:Friday was pretty quiet in Europe. Both the U.K.’s Telegraph and Times newspapers warned that mortgage costs will rise even if the BOE cuts rates as banks widen lending margins. With inflation high and consumer confidence low it can only impact on spending patterns which will squeeze businesses further. States releases overnight:       March                                            Forecast    Actual U.S. Import Price Index         (MoM)   +1.9%    +2.8% U.S. Import Price Index          (YoY)   13.6%    14.8%April University of Michigan Confidence          69.0       63.2U.S. figures continue to provide no relief from the wretched series of numbers with the University of Michigan Confidence index falling to the lowest in 26 years. The group announced “There have only been a dozen other surveys that have recorded a lower level of consumer sentiment in the more than 50-year history of the survey.”“Persistently high food and fuel prices as well as rising unemployment have caused consumers to view their future financial prospect more negatively than at any other time since 1980.” Why didn’t I start with a report on the G7 meeting? Well, I wanted to initially highlight the continuing squeeze on consumers and this isn’t just happening in the States but globally. This has the potential to provide a domino effect as high inflation and reduced consumer spending power outside of energy and food could see a systemic reduction in real spending.And this is what G7 have to address.The G7 statement itself was inconclusive. The area concerning Forex rates read:“We reaffirm our shared interest in a strong and stable international financial system. Since our last meeting, there have been at times sharp fluctuations in major currencies, and we are concerned about their possible implications for economic and financial stability. We continue to monitor exchange markets closely, and cooperate as appropriate. We welcome China’s decision to increase the flexibility of its currency, but in view of its rising current account surplus and domestic inflation, we encourage accelerated appreciation of its effective exchange rate.”Obviously the majority of the statement concentrated on the credit crisis since it is where the majority of the stress lies. Mention was made of “significant deleveraging” and one paragraph summarizes the current issues:“The turmoil in global financial markets remains challenging and more protracted than we had anticipated. In the context of a weaker economic outlook, financial markets confront the interrelated issues of: re-pricing of risk and significant de-leveraging; managing counterparty risks; accommodating balance sheet adjustments; raising capital; improving the liquidity and functioning of key markets. We welcome efforts by many financial institutions to improve disclosure of exposures to structured products and related risks, and raise significant new capital.”What immediate impact may this have?The Dollar has opened sharply higher this morning indicating that some feel that there is a higher risk of concerted intervention. I’m not sure this is likely at the current point though it is something to consider. If any thing, in isolation, the comments on Forex rates which some consider to be harsher compared to the February statement, can be simplified as changing from “we think the market is full of naughty traders” to “we think the market is full of very naughty traders.”Words may have temporary impact but away from the immediate reaction of covering some short positions for safety they will soon be forgotten when the next negative set of figures are released.It reminds me of the phrase “Action speaks louder than words.”Well, action implies concerted intervention. Is this likely? I’m not sure that it is from the wording of the statement but we can’t totally ignore the possibility.As I have mentioned before, concerted central bank intervention has not been vogue for over a decade and more like two decades. The EU’s Juncker even suggested they had no interest since it is ineffective. One European official said that they had pressed President Bush who reaffirmed a strong Dollar policy. I find the statements confusing since they almost appear to suggest that because the President wants a firm Dollar then they’ll do something about it – that something being intervention. However, Juncker himself said that unilateral intervention is worthless.Even so, we are not talking about normal market conditions but conditions that are providing greater strain since, as some have described it, the 1930’s Great Depression.From that point of view intervention can smooth Forex movements and potentially give time for other action to occur. Thus, we cannot rule it out should G7 ministers and central bankers feel it will reduce stress in the financial markets.However, it isn’t a remedy for the problems and this is where the solution will lie. The credit crisis has been a direct result of over leveraging, poor risk control and excessive risk. The only solution can be imposition of controls over excessive leveraged trading which will reduce volumes and more likely bring two-way trading that dampens market moves.These controls are unlikely to be decided upon quickly. In the meantime there may be a possibility of limited intervention but at this moment there is no real indication that it is favored. Thus this morning’s gap high in the Dollar could quite easily be reversed. How the Dollar reacts this week could set the scene for the coming weeks, possibly months. More later once the daily analysis has been done…There following releases are due from Asia due today:Australian February Home Loans            (MoM)    +0.5% Australian February Investment Lending (MoM) Bank of Japan publishes the minutes of the March Monetary Policy Meeting 9 application/xml false credit crisis currencies EU Euro-zone Fed Forex FX G7 intervention leveraging US New to Forex? 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