11 JUNE 2013: USD SLIPS AGAINST YEN AND EURO

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The Bank of Japan (BOJ) did not intervene in the volatile bond market and kept monetary policy steady at yesterday’s meeting. The decision strengthened the Yen. USD/JPY trades at 98.42 EURO/USD, which started the week at 1.3193 and has climbed 80 points to 1.3272. The Dollar, which hit a 4-1/2-year peak against the Yen of 103.74 last month, has since fallen.

Asian stocks sagged to a fresh 2013 low due to the Chinese growth worries and continued uncertainty over US monetary easing and its bond buying program. The Nikkei N225 ended 0.7 % down, while USD/JPY declined 0.4 %. The South Pacific MSCI-index shed 0.9 % and fell for the fifth straight day in a row. In New York, Dow Jones ended slightly down at 15. 238. Nasdaq was in positive territory, 0.13 %, after a 1.71 % gain for Intel, which was the winner of the day.

The international rating agency, Standard & Poor’s, raised the US economic outlook to stable from negative, from the positive jobs data presented last Friday. The upgrade will contribute towards keeping the speculation about an eventual softening of FED’s strong commitment to quantitative easing alive. Both global equity and commodity markets have recently been jolted by FED stimulus concerns, slowing growth in China, contributing towards the continued recession in Europe and big turbulence in the Japanese stock and bond markets.

This volatility clearly demonstrates the weaknesses of monetary easing. It boosts liquidity and exacerbates moves in the financial markets without having a real impact on the real economy. Abenomics led to a strong stock rally and a steep fall in the Yen. Over the last two weeks Nikkei has lost 20 % and USD/JPY is up 5 % . Most analytics continue to be bullish on USD and stress that long-term capital flows are moving into US corporate bonds. This will strengthen the USD.

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05 April 2013: Draghi: Cyprus not a template

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Cyprus is not a template for other possible banking crisis inside the Euro zone, the president of the European Central Bank, ECB, Mario Draghi stated after the ECB board meeting yesterday. Draghi thereby criticized his own decision where Cyprus banks with the blessing of the ECB, was given the right to confiscate funds on private banking accounts below the guaranteed Euro 100 000. Draghi admitted that the proposal was not very “smart”, and stressed that potential future crises would be handled differently without risk for private account holders and companies. This initial wrong decision was quickly corrected, Draghi added.

It took, however, more than a week before the ECB sponsored proposal was rejected by the Cypriot parliament and a new bailout plan was presented. In the meantime it created confusion and havoc in the global financial markets. The new proposal exempted accounts with a balance below Euro 100 000 and from confiscation and left to foreign account holders, mainly Russians and Ukrainians, to bear the bulk of the bailout burden.

The Euro fall as low as 1.2745 on Draghi’s remarks. Euro/USD later recovered strongly to 1.2933. The way ECB and the EU have handled the Cyprus crisis, has, however, put grave question marks as to Draghi and EU-politicians ability to handle the euro zone problems. The crisis ridden Southern European periphery is dragging further into recession, and the only solution the troika of EU, ECB and the International Monetary Fund, IMF, has been able to come up with is a further vicious circle of reduced economic growth, increased taxes and growing unemployment.

Draghi had suggested yesterday that ECB could slash the interest rate, already at a record low level, even further. In a situation where the currency rates are highly volatile and often jump more than one percent a day, a reduction of the interest rate with 0,25% is not the most convincing argument to get the euro zone back on track. Along with low interest rates quantitative easing has been central banks preferred tool. ECB has heavily been buying national bonds in Italy and Spain to avoid spiraling bond rates.

Bank of Japan which also met yesterday, announced aggressive measures to ease monetary policy. USD/JPY plummeted from 93 to 95,67. BOJ will in the next two years double its holding of bonds and shares in line with the monetary easing policies of the US Federal Reserve (FED). BOJ has also set an inflation target of 2% to stimulate economic growth. BOJ’s plan implies to buy bonds for an equivalent of USD 73 Billion monthly. Fed is in comparison buying for USD 85 billion a month. Wall Street got a lift from BOJ’s surprisingly dramatic stimulus plan. This came along with supportive comments from ECB and FED, suggesting that central bank policies will keep underpinning measures to the benefit of stocks. 

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