New Overnight Developments Abroad: BOJ Expected to Ease on Friday

December 17, 2008

The dollar fell 1.2% against the Swiss franc, 0.8% against the euro, 0.6% against the yen, and 0.5% against the kiwi. The greenback shows no change against the Australian dollar and gains of 0.8% against sterling and 0.2% relative to the Canadian dollar. The yen hit a new cyclical high of 88.18 per dollar. Sterling hit a new record low of EUR 0.9156, which translates into DEM 2.1361, 1.3% below its lowest-ever level against the D-mark of 2.64 in November 1995.

Analysts now expect the Bank of Japan to cut its 0.3% overnight target rate by 15-20 basis points on Friday. Expectations were moved in this direction by the yen’s latest upward push, the very weak Tankan report, the larger-than-consensus rate reduction by the Fed yesterday, and mounting political pressure on the Bank of Japan. Japan’s Finance Minister was reported to have said that intervention is not being considered.

Asian stock markets closed higher following the upsurge in U.S. equities after the Fed’s announcement. Bourses rose 2.2% in Hong Kong, 1.6% in Indonesia, 1.6% in Vietnam, 0.5% in Japan, and 0.4% in Australia. European stocks are trading lower, however, with the Dax, Cac40 and Ftse down 0.7%, -0.5%, and 00.2%.

The 10-year JGB yield sank 7 basis points to 1.295%, lowest since April amid speculation that the Bank of Japan will cut its target rate.

Oil jumped 3.3% as OPEC agreed to cut production by 2 million barrels per day in January. Gold is 1.4% higher.

Britain’s claimant unemployment count surged 75.7K last month, the biggest monthly rise since 1991, and to 3.3%. October’s increase was revised to +51.8K from 36.5K. The claimant count level surpassed 1 million for the first time since 2001. On the harmonized ILO measure, the jobless rate advanced 137K over the past three months and to 6.0% in August-October (most since mid-1999) from 5.5% in May-July. British average earnings, a gauge of wage pressure, rose 3.3% y/y in August-October, same as in 3Q but higher than forecast. October wages were 3.7% above the October 2007 level, a spike from 3.1% in the year to September.

Euroland confirmed a deceleration of consumer price inflation to 2.1% y/y in November from 3.2% in October and a high of 4.0% in July. Consumer prices fell by 0.5% on a monthly basis. Core consumer prices were unchanged on the month but edged 0.2 percentage points lower to 2.2%. Overall consumer prices fell in all members of Euroland on a monthly basis.

Euroland construction output edged up 0.1% in October after back-to-back sharp drops of 3.5% in the second quarter and 1.2% in the third quarter.

Ukraine’s currency, the beleaguered hyrvnia, slumped another 5.6% and is 48% weaker than at end-August.

Hong Kong monetary authorities intervened again to cap strength in their currency and keep such at its target ceiling against the U.S. dollar.

Indonesian monetary officials imposed two new regulations designed to impede derivatives activity that could depress the rupiah.

The Russian ruble suffered another mini-devaluation against its target basket, the second this week. The incremental drop of 1.2% was larger than previous depreciations.

Released minutes from interest rate meetings earlier this month in Sweden and the U.K. revealed unanimous votes in favor of rate cuts of 175 basis points and 100 basis points. The Bank of England’s minutes indicated that policymakers had considered a rate cut of more than 100 bps but rejected that idea because markets would be surprised and sterling might fall excessively in response. Blanchflower of the Bank of England separately is predicting that the ILO measure of unemployment, which now stands at 1.864 million workers, will climb above 3 million in 2010.

The CBI monthly survey of British retailers recorded sharp drops in the indices of sales to -55 from -46 in November and in orders to -58 from -46. Both were new lows for this data series that started to be collected in 1983.

Final German CPI figures confirmed such fell 0.5% on month in November, cutting the on-year increase to 1.4% from 2.4% in October and 3.3% in July. German consumer prices fell 1.1% at a seasonally adjusted annual rate in the four months between July and November.

Euribor rates continue to grind slowly downward. The three-month rate is now at 3.155%.

Kuwait’s discount rate was lowered to 3.75% from 4.25% following the Fed’s rate cut.

South African core consumer price inflation slowed for a third consecutive month to 12.1% in November from 12.4% in October.

Skilled job vacancies in Australia fell 15.9% this month and by 48% from December 2007.

The U.S. third-quarter current account will be reported at 13:30 GMT by the Commerce Department, along with capital flow data to show how the deficit was financed.


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