Risk Off Trading Boosts Yen and Dollar

May 3, 2011

Three factors are weighing on investors’ appetite for risk: the possibility of Al Qaeda reprisals, an unexpectedly sharp drop in Britain’s purchasing managers index, and a greater-than-anticipated interest rate hike in India.

The yen rose 0.5% against the dollar and is again stronger than 81.0.  The dollar otherwise advanced by 1.0% against sterling, 0.7% relative to the New Zealand and Australian dollars, 0.4% against the euro, 0.3% versus the Canadian dollar, 0.2% against the Swiss franc and 0.1% against China’s yuan.

Stocks fell broadly and in some cases substantially.  Equities are down 2.4% in India, 2.1% in Thailand, 1.3% in South Korea, 1.2% in Sri Lanka, 0.8% in Singapore, Pakistan, and Australia, and 0.7% in Taiwan.  Japanese markets were closed for Constitution Day, the second of four Golden Week holidays.  Chinese stocks bucked the trend, firming 0.6%, but in Europe, the Dax, Paris Cac and British Ftse show losses so far of 0.9%, 0.7%, and 0.1%.

The 10-year British gilt yield increased five basis points.  The German bund yield is one basis point higher.

Typical of a risk off market, oil and gold prices are down 1.0% and 0.8% at $112.44 per barrel and $1544.10 per ounce.

Countries that had been observing May Day holidays on Monday released manufacturing purchasing manager survey results.

  • Most notably, the British index fell 2.1 points to a seven-month low of 54.6.  Analysts were expected something marginally above 57.0.
  • The Irish PMI rose 0.3 to a 2-month high of 56.0.  Input price inflation eased slightly.
  • Russia’s reading of 52.1 was 3.5 points lower than in March, which was the greatest month-on-month deterioration since end-2008.
  • The Saudi PMI score of 62.7 was near to the March reading of 62.8.
  • In the United Arab Emirates, a record high of 57.5 was reported for April.  Such had been 54.7 the month before.
  • Taiwan’s 58.2 was the best reading since 59.6 in January and 2.6 points better than the score in March.
  • South Africa’s PMI of 56.4 was 0.8 points lower than March’s 13-month high.
  • The Australian purchasing managers index remained below 50 but rose to 48.4 from 47.9.  The sub-index for production improved 2.4 points to 53.3, but that for new orders fell by 2.7 points to 46.4.

There’s been a lot of action on the central bank interest rate front today.

  • The Reserve Bank of India reverted to a rate hike of 50 basis points.  The prior three increases had been by 25 bps each.  The key central bank lending or repo rate becomes 7.25%.  Officials will henceforth keep such at a 100-bp premium to their key borrowing or reverse repo rate, which was lifted by 50 bps to 6.25%.  Reserve requirements were not changed this time.
  • The Reserve Bank of Australia left its Official Cash Rate unchanged at 4.75%.  There had previously been seven increases, each by 25 bps but none since November.  Today’s decision was expected.
  • In another anticipated move, the National Bank of Romania left its key interest rate at 6.25%, the level for the past 12 months.
  • Minutes from the Swedish Riksbank indicated some concern among the majority of officials that expected inflation and wage pressure might rise.  So far that hasn’t happened, and the central bank continues to pursue a program of gradual but steady interest rate hikes toward greater normality.
  • Still to come today are the minutes from the last Sedlabanki interest rate meeting in Iceland.

Producer prices in the euro area shot up another 0.7% in March because of a 1.9% jump in energy.  Non-energy producer prices firmed 0.2% but were 4.5% higher than a year earlier.  PPI inflation during the first quarter ran at a double-digit pace of 11.5% annualized.

In Britain, the industry group CBI released its monthly survey of retailers, which improved to a reading of 21 in April from 15 in March and 6 in February.  The index had ranged between +33 and +56 from last July through January.

On-year growth in New Zealand wages and salaries accelerated to 1.9% in the first quarter of 2011 from 1.7% in 4Q10 and 1.6% in 3Q10.

Thai producer prices increased 1.4% last month and were 6.6% higher than in April 2010.  Consumer price inflation accelerated to a 12-month increase of 4.0% from 3.1% in the year to March.  Core CPI inflation was 2.1%, up from 1.6% in March.

Turkish producer prices increased 0.6% last month but slowed to an 8.2% on-year pace from 10.1% in the year to March.  The Turkish CPI went up 0.9% on month and accelerated to 4.3% on year from 4.0% in March.

Hong Kong retail sales were 20% greater than a year earlier in volume terms during March.

Danish unemployment held at 4.0% in March. South African unemployment, representing the other extreme, worsened to 25.0% in the first quarter of this year from 24.0% in the final quarter of 2010.

Scheduled U.S. data today include factory orders, auto sales, and weekly chain store sales.  Kansas City Fed President Tom Hoenig, a policy hawk, speaks today.

Copyright Larry Greenberg 2011.  All rights reserved.  No secondary distribution without express permission.

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