New Overnight Developments Abroad: G7 Protests Excessive Yen Strength

October 27, 2008

Stocks plunged further in Asia. The Nikkei fell 6.4% to its lowest level since October 1982. Stocks dropped b 12.3% in the Philippines, 12.2% in Hong Kong, 9.5% in Thailand, 8.3% in Singapore, 7.1% in China, 4.6% in Vietnam, and 3.6% in both India and Malaysia. Stocks in Europe are down 5.9% in France, 5.4% in Sweden, 5.2% in Italy, 4.7% in Great Britain, 4.4% in in Switzerland and 3.4% in Germany.

G7 finance ministers and central bank chiefs released a statement protesting recent movements in the yen. The three-sentence statement was patterned after their April 11th warning against sharp forex fluctuations. The new statement explicitly objects to recent excessive volatility in the yen. The statement hints of intervention. Unfortunately, the yen is not rising because of anything happening in Japan but rather as a result of a mass flight from carry trades caused by deleveraging.

Several emerging market currencies (Serbian dinar and Indonesian rupiah, for example) were defended with intervention. The Reserve Bank of Australian may have intervened in European markets, as the Aussie dollar sank to a record yen low. The U.S. dollar is 2.0% weaker against the yen despite the G7 warning, and it also slid 0.6% against the Swissy, another former carry trade financing currency. Otherwise, the dollar shot up 3.5% against sterling, 3.1% against the kiwi, 2.7% against the Australian dollar, 1.3% against the euro, and 1.0% against the Canadian dollar.

The Swiss franc hit an all-time high of 1.4301 against the euro. The Indian rupee hit a record low against the dollar, which remained very well bid against the currencies of a broad range of emerging markets.

The Danish central bank and ECB established a EUR 12 bn swap line between them to assist Danish efforts to keep the krone/euro rate steady.

10-year sovereign bond yields are lower in Japan (-2 basis points to 1.47%) and Europe.

Commodities dropped further. Oil lost 3.5% to $61.90/barrel despite Friday’s production cutback accord by Opec in Vienna.  Gold is at $714.60, down 2.1%.

The Bank of Korea met in emergency session and announced an unprecedented record 75-bp rate cut to 4.25%. Such follows a cut of 25 bps on October 9th.

The German business climate index, calculated by the IFO Institute, fell more than expected to 90.2 in October from 92.9 in September and 104.6 last March. All of the drop was attributed to deteriorating expectations. The business situation ticked up a tenth, but expectations posted their sharpest 1-month decline and hit their most pessimistic level (81.4) since 1991. The sub-indices for manufacturing fell to -18.9 from -11.7 in September and for wholesalers to -15.1 from -10.3. Declines were less pronounced for construction and retailers, although their respective levels of -27.6 and -25.0 were very depressed in October. IFO officials urged the ECB to cut its repo rate by 50 basis points ASAP and to implement a third rate reduction before yearend. With the FOMC meeting this week, speculation surfaced of another round of rate cuts.

Money and credit growth slowed in Euroland. M3 posted its fifth straight monthly deceleration, posting on-year growth of 8.6% in September and 8.9% in 3Q. Private sector loans rose 8.5% in the year to September, with gains of 4.0% for mortgage loans and 12.1% to non-financial firms decelerating as well. M1 rose 1.2% y/y.

Japanese corporate service prices slid 0.4% m/m in September after a drop of 0.5% in August and no change in July. On-year CSP inflation relapsed to 0.1% from 1.4% in both July and August. Yamaguchi of the Bank of Japan said the economy faces a tough situation due to the drop in share prices and rise of the yen, but he also argued that BOJ rates are already very low. Prime Minister Aso pledged to escalate fiscal support to fortify bank capital and share prices. Japanese bank share prices tumbled more than 10% today.

New Zealand markets were closed for Labour Day.

Britain’s Hometrack house price index fell 1.3% on month in October to a 31-month low and by 7.3% from October 2007.


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