First things first. The Financial Times ran a weekend front-page story revealing that Sarkozy and the Chinese have been holding secret meetings for the last year on the issue of global currency stability. It was unclear what efforts Sarkozy was pursuing but he was looking to get Chinese support for whatever he is going to try to accomplish when he gets the leadership post of the G-20. The French have been trying to replace the U.S. DOLLAR as the world’s reserve currency since the days of DeGaulle and Jacques Rueff. We have warned that Sarkozy is desperate to make a grand play on the international stage as his political support in France has badly eroded. Wen Jiabao is in Europe this week for talks with the EU on many issues.
Posts Tagged ‘MOF’
Notes From Underground: Did Dudley DO RIGHT on his mounting a possible expansion of monetary easing?
October 4, 2010Notes From Underground: China begins a game of Chicken to see if Schumer is a rebel without a cause
September 26, 2010During the weekend BOJ Governor Shirakawa delivered a speech in which he stated that the BOJ is “ready to take appropriate action if needed” to deal with the strength of the YEN. It seems that the Japanese government has been getting more heat from the corporate sector because of the YEN’s relative strength and the damage it is doing to the major exporters. Shirakawa offered caution on how the “appropriate actions would proceed as the BOJ is prohibited from “monetizing debt” and it also does not want to risk raising bond yields from fear of inflation.
BOJ seems to have a self-imposed cap on government bond buying so as to avoid debt monetization. Shirakawa alluded to the concept that the BOJ could not buy an amount bigger than the cash in circulation. He didn’t say that it was illegal restraint or just a precautionary stance. The BOJ is on the HORNS OF A DILEMMA as it risks creating inflation that would badly undermine the vast majority of domestic Japanese investors. It is important to remember that 97 percent of all outstanding JGBs are owned by the Japanese themselves–unlike the holdings of U.S. treasuries and MBSs. No wonder the Chinese are buying Japanese debt. It would be political suicide for the MOF to push too aggressively on the monetary creation issue for the huge impact it would have on retiring Japanese savers. Shirakawa and the bank, though, appear nervous that politicans such as the defeated OZAWA will make some move to amend the Bank of Japan law, which guarantees its independence. This is a very serious dilemma for the Japanese polity and we will watch closely. Ever since the initial intervention of September 15,the DOLLAR/YEN has settled down but the EURO/YEN has rallied from 108 to close out last week at almost 114. This is the best effect the Japanese could have gotten.
After all the glad handing between Wen Jiabao and Obama, China this week announced that it was levying anti-dumping duties on the import of U.S. chicken products. It has accused the U.S. poultry industry of dumping chicken broiler parts, which has caused damage to its domestic industry. China says it will palce import surcharges of 50 to 105 percent. In the mainstay of world trade, this is no big deal–ok chicken shit–but it sends a message. Schumer and others want to place a tariff on the Chinese for currency manipulation, but the Chinese know that rural, agrarian states in the U.S. Senate and these states have a great deal to lose in a trade war with the U.S. American farmers are doing phenomenally as they export massive amounts of product to the Chinese. Many traders have been blindsided this summer by the continuing strength in ag markets, even as the U.S. farmers bring in record crops. Latin America also had large crops last year so even with drought in Russia and Ukraine, crop prices were and have held up very well. Even Caterpillar and John Deere have been in opposition to the Schumer initiatives. The Chinese have put the senate on notice that the tariff game is much more complicated than the simplistic language of populism.
The most interesting article over the weekend was the front page WSJ piece about the super-secret committee of European heavyweights that met to make sure the entire EU project didn’t implode. The acrimony between Sarkozy and Merkel was very real and we would suggest that the wounds will take long to heal. Sarkozy was doing everything he could to gain the upper hand on the bailout of the PIIGS and it was reported he tried to bring a television crew to one of the meetings as to embarrass Merkel.
As the story unfolded, it was a real possibility that the EU could have blown apart. As we blogged about a month ago, the idea of Sarkozy heading the G-20 beginning in November 2010 needs constant surveillance as a politically wounded Sarkozy is capable of great mischievous. The stresses in the foundation of Europe are far from over as the WSJ poignantly exposes. Yes, the EURO has rallied more than 10 percent since the height of this summer’s tensions. It probably is the surest sign of how weak the underlying fundamentals are for the U.S. DOLLAR. The more that is revealed about the fragility of the economies of the developed world, the more we realize how difficult the trading environment is and will continue to be. Keep your technicals up and be ready for violent swings as the global political economy reacts to sudden changes wrought by weak economic fundamentals. Throw in the impending trade friction and the surprises can come from all corners of the world. This is not the environment to be playing CHICKEN.
Notes From Underground: The Kiwi RBNZ CHECKS; the BOJ BETS; the CHINESE YUAN RAISES; and the Swiss … ?
September 16, 2010Wednesday 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.”
Notes From Underground: Obama and Peggy Lee … is that all there is?
September 7, 2010The labor day period ended and the markets returned to risk-off profile as the media was awash with stories about the European stress tests being flawed. It seems that some analysts have awoken to the fact that the European tests were curved so as not to be overly bogged down by sovereign debt issues. There is nothing new to this as we talked about the flaws in the tests when they were administered, but the market ran with the “story” anyway and so we had a day of risk off. In addition to the Euro stress tests there was some softer German manufacturing data, which aided the equity selloff and, of course, put downward pressure on the EURO and other non-dollar currencies. The YEN, SWISS FRANC and GOLD were the biggest beneficiaries along with the long end of the global DEBT markets.
The Japanese are certainly not happy with the YEN strength but at this time it seems like there is not a great deal that the BOJ or MOF plan to do. In a Wall Street Journal opinion piece by Naomi Fink, who we consider to be a first-rate analyst, argues that the appreciating YEN may well be a blessing for the Japanese. We don’t agree with her analysis at the present time, but we think she raises many interesting points and is certainly worth reading and considering.
In Australia, we heard that Julia Gillard has cobbled together a Labor-led coalition in Australia. If the outcome means that the resource extraction gets watered down, we would view this as a positive for the AUSSIE. The Labor program has yet to be finalized so we are still cautious in our Aussie bullishness. The RBA stood pat on rates and offered a somewhat hawkish statement, but global growth uncertainty tempered any Aussie growth prospects.
Tomorrow morning we will hear from the Bank of Canada. The market is mixed about the probability of a rate rise–overnight rates are currently 75 basis points and it’s 50/50 that they will raised to 100 basis points. As with Australia, we will read the statement carefully. The latest data in Canada has been mixed but the BOC has been desirous of getting ahead of the curve but we want to see if the lack of U.S. growth causes the Canadians to hold rates since they remain cautious because of slowness in the other developed countries.
A reader of ours raised a question about the reason Larry Summers is in China during recent economic policy headlines from the OBAMA administration. The point raised was that Summers may be there to inform the Chinese that there are plans to refinance MBS mortgages and because China holds a great deal of that paper they want to let them know what the plans are and the potential impact the REFINANCE will have on the Chinese. Maybe a mark down of MBS is a far less painful path than to have tariffs and surcharges imposed on Chines imports. Senator Schumer is banging the drums louder for Chinese revaluation, which will benefit no one but send fears of an impending trade war. We stress again that the biggest bang the Obama administration can get would be a massive refinance plan, which would result in much lower monthly mortgage payments and aid millions of people who are currently underwater on their homes but would stay current with a much lower monthly payment.
Renowned investor Wilbur Ross added more support to this argument. Ross, who has invested heavily in the finance business in the last two years believes that the government should aid homeowners to avoid “negative equity rat holes.” In an interview, Ross said “holders of MBS securities should get tax benefits for giving borrowers better terms.” Yes, we know that ROSS and his companies will come out to the good but we only care if the policy makers latch on to this concept. Mortgage relief is what is needed to halt the rise in foreclosures, which is putting even more pressure on bank balance sheets and thus tying up the securitization market. Credit will not flow until banks have some sense of certainty that the downward pressure on residential real estate is abating. The effort to stem the balance sheet recession has to begin somewhere. Why not mortgage relief? Drips and drabs of tax relief will not prevent further write downs or get credit flowing, for as the market asked today: Is that all there is?
Notes From Underground: The Dutch may have windmill but markets have rumor mills
August 30, 2010First things first: The Japanese Central Bank did in fact hold an emergency meeting Sunday. The market’s initial reaction was to sell the YEN. But the market was disappointed when the BOJ and MOF trotted out the same old, tired plans for stimulus at a press conference. There would be no intervention to halt the YEN appreciation, thus the market reversed the YEN selling and the DOLLAR was sold off by 150 pips. All the YEN crosses also reversed–the market punished the Japanese for TALKING LOUDLY AND CARRYING A LITTLE STICK. Moral of the story for Finance Minister NODA and MOF GOVERNOR SHIRAKAWA: Like a groom on the honeymoon, don’t promise more then you can deliver.
Notes From Underground: BOJ is emergency meeting tonight–Shirakawa leaves Jackson Hole early
August 29, 2010The Jackson Hole Symposium is over. The talking heads attempted to spin the Bernanke speech as the mainstay of the discussion. However, we are hard pressed to find anything new in what Bernanke had to say. He basically laid to rest the idea of cutting the interest rate on bank reserves since the FED seems to be very uncertain about the effects it would have on various market participants. Also, Chairman Bernanke seemed to slay the idea that the FED will move toward an inflation target. The markets took solace in the fact that the FED will be there to support the markets if the recovery grinds to a halt, but for now the FED sees no immediate need to undergo a new more robust QE 2.
Notes From Underground: Mr. Yen is looking for love in all the wrong places
August 16, 2010There was little news this weekend in the arena of financial enlightenment. There were several stories about the FED and its balancing on a tightrope of inflation/deflation. Thomas Hoenig, the dissenter from Kansas, was out making sure that the markets understood that he was not calling for tightening but rather was trying to keep the FED from painting itself into the same corner that it had under SIR ALAN. Hoenig wants the “extended period” language exorcised from the FOMC release so that the FED has more flexibility to move if and when robust growth emerges.
Notes From Underground: As the sun sets on Europe, we need to shine light on Japan
May 13, 2010Trichet said today that the ECB purchasing of European sovereign debt was not quantitative easing. Our only respone is similar to Bill Clinton’s: fellatio is not sex.