Notes From Underground

Wednesday night,  we learned that the RBNZ held rates at 3 percent, as was expected. The bank’s governor, Alan Bullard, cited the recent earthquake and the havoc it has caused to the New Zealand economy as the main reason why the RBNZ was on hold for now and most probably for the near term. More importantly, Bullard was the second central banker in a week to note the slowing of the global economy, particularly the fact that the U.S. was “slowing noticeably.”

The Canadians also noted the recent slowing of the U.S. economy as the reason the BOC might not be able to raise rates as fast as the Canadian data might necessitate. We wonder whether the world’s central bankers are reacting to news headlines or are they privy to more detailed info that is exchanged at meetings like Jackson Hole. Next week’s FED meeting has now taken on a heightened importance in regards to the FOMC release and we do not mean in reference to the “extended period” language. Is there something the FED is aware of that will spur a speed up in a second QE? We thought the FED would move cautiously but with two key central banks referring to the slowing of the U.S., we are going to be more than casually attentive.

The biggest story of the last 24 hours has been the Japanese MOF’s intervention. After Kan’s defeat of Ozawa, the BOJ and the MOF mustered the strength to halt the appreciating YEN by selling unknown amounts of YEN into the markets. They noted that these nearly place reserves will not be drained and thus we effectively have a form of QUANTITATIVE EASING. Some have posited that the action was unilateral, while the Japanese have claimed that they alerted the U.S.and European officials. Regardless of who knew what when, the Japanese have taken a step to try to generate some of money growth in its economy. A nation that is under the spell of DEFLATION just cannot tolerate the effects of an appreciating currency for it is tantamount to Britain going on the GOLD standard in 1925. If the YEN were to keep appreciating, Japanese wages would be under more stress if Japan is to maintain some type of competitive edge in global markets. Lower wages with deflation is not going to kickstart the domestic economy.

Some pundits on CNBC suggested that Secretary Geithner should be very forceful in admonishing the Japanese for having the audacity to intervene in the currency markets but the only quote we found from Geithner was in a BLOOMBERG article and its tone was respectful:

“They’re working through some difficult problems.My view is they should be focusing like we are on how to make sure they’re reinforcing recovery in Japan and doing things that are going to help.”

This language seems rather conciliatory and not incendiary and for this we applaud Mr. Geithner. The present global problems are not made in Japan and if currency depreciation would kickstart theJapanese engine, the world would be better for it. The Europeans voiced concern through the offices of Jean Claude Juncker who voiced concern that the Japanese preceded unilaterally with out a coordinated effort. AGAIN,IF WE RAN THE JAPANESE MOF WE WOULD HAVE BOUGHT EUROS AND SOLD YEN for that is where the greatest impact would have been.

Interestingly, is that the Chinese YUAN has been rallying for the last week in the wake of Larry Summers visit and yet the Japanese still had the gumption to intervene. The CHINESE have played the political card here of attempting to stave off the Schumer/Graham threats. Some have maintained that the Japanese have given cover to the Chinese by their moves. Again, we caution that Geithner’s comments do not give credence to that opinion. Geithner will be testifying on the HILL tomorrow so we will see what he adds to Wednesday’s statement.

Finally , we get the SNB interest rate decision at 7 a.m. CST. The market has some expectations of a SWISS rate raise as the DEC. EURO SWISS interest rate contract is trading 6 basis points below present rates. We doubt that the SWISS will raise rates with the FRANC sitting at very high levels, but we are alert to possible action. With the Japanese action, we would be shocked if the SWISS were so willing to let their currency strengthen even more. There are those who believe that the YEN action will fail because the previous SNB intervention was such a dismal failure.

We think though the the two situations are vastly different. The SWISS miscalculated on how nervous EUROPEAN money was and how much it craved a safe haven from the turmoil of the PIIGS. Switzerland provides the perfect haven for European money as it has a reputation for frugality, responsibility and most importantly, has geographical desirability. Japan is not appreciating out of fears about Asia so its safe haven status is of minimal importance. We await more Central Bank actions and statements to find out who is all IN.

Tags: Alan Bullard, BOC, BOJ, China, deflation, Euro, Fed, FOMC, Geithner, MOF, QE, RBNZ, SNB, Swiss Franc, Yen, Yuan

This entry was posted on September 16, 2010 at 5:03 am and is filed under Canada, China, Federal Reserve, Japan, New Zealand. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.