From Marc to Market:
Overview: The record-long yen slide has stalled just shy of JPY129.50, even though the Bank of Japan defended its Yield-Curve Control cap on the 10-year bond and will continue to do so for the next four sessions. The greenback fell to almost JPY128 before steadying. China again defied expectations for lower rates (loan prime rate), the yuan's sell-off accelerated and slide to its lowest level since last October. Chinese and Hong Kong shares fell, but most of the other large markets Asia Pacific advanced. The Stoxx 600 is firmer in Europe, but US futures are off 0.5%-1.0%. The Swedish krona and Australian dollar lead the major currencies, all of which are stronger against the greenback through the European morning. Central European currencies may be aided by the euro, but other emerging market currencies are heavier today. The US 10-year yield is off six basis points to around 2.88%. European yields are also 5-8 bp lower.
Gold was sold to a seven-day low near $1940 before recovering, and June WTI is consolidating in the $102-$103.65 area after being turned back from approaching $110 earlier this week. US and European natgas are diverging. US natgas is off for a second session after falling 8.25% yesterday, it is at a four-day low. Europe's benchmark is up 2.3% today after yesterday's 7.75% gain to trade at a five-day high. Iron ore is steady after falling almost 5% yesterday. Copper is lower. It fell yesterday to snap a four-day advance. July wheat is steady.
Asia Pacific
After last week's decision to keep the benchmark 1-year Medium-Term Lending Facility rate unchanged, the odds of a cut in the loan prime rate today fell. However, some thought it was still likely, and were disappointed by today's decision to keep the one-year and five-year rates steady (3.7% and 4.6%, respectively). Chinese officials seem to be continuing to struggle of how and when to support the economy. The nearly two dozen measures announced yesterday were largely micro measures to ease the pressure on households and small businesses. More is going to be needed. In the meantime, as we anticipated, a weaker exchange rate, is also a shock absorber that could be used with little pushback given the broad greenback gains. The yuan's two-day drop of about 0.7% may not sound like much, but it is the largest two-day decline since last June.
There continues to be lots of talk about challenges to the role of the dollar and diversification of reserves. Japan, with the second largest holdings of reserves, has an opportunity. The one-way market in dollar-yen, 13-sessions coming into today, is not healthy, and Japanese officials have repeatedly expressed concern about the pace of the move. If Japanese officials wanted to reduce their dollar holdings, reduce their reserves, which had been built up in the 1980s and 1990s through intervention, isn't this an ideal time? The dollar is trading around 30-year highs against the yen. The dollar has risen almost 12% against the yen this year already. Central banks, it has been said, are long-term counter-trend speculators. Central banks accumulate dollar assets when the dollar is weak not strong.
This is not to suggest actual material intervention is likely. Officials would take a few more steps up the intervention escalation ladder, such as shifting the focus from the pace to the level. They would also likely ratchet up the rhetoric to talk about "disorderly markets" and "excess volatility". These are the conditions under which intervention can be justified. The relative strength of the yen over time has forced many industries in Japan to restructure their business to operate in a reasonably strong yen world. The yen is the most under-valued in more than 30 years against the dollar, according to the OECD's measure of purchasing power parity (-33.2%). If the yen's weakness is sustained, another major adjustment will prove necessary over time.Japan still runs a current account surplus; it is just not driven by the trade balance. In fact, Japan reported a larger than expected March trade deficit earlier today. The JPY412 bln shortfall reflected slower exports and stronger imports. Although the JPY130 area is now widely recognized as the next important chart point, we suspect that it is no line-in-the-sand for Japanese officials. The argument in some circles that the BOJ's cap on the 10-year yield is weighing on the yen is refuted, or at least challenged, by today's developments. The BOJ offered to buy an unlimited amount of 10-year bonds at 0.25% today and indicated it would stand ready to do so over the next four-sessions. The yen recovered as some late shorts covered. This would seem to suggest that if the BOJ were to abandon its yield curve control, after an initial adjustment period, the yen could weaken again. One key seems to be the cost of hedging and setting the currency hedge ratios. Another consideration is the appetite from non-currency hedged exposure....
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