Japan appears to be reaping the benefit of lower energy prices, as surging exports to Asia compounded with lower import bills to reduce the trade deficit by more than half. Shipments to both China and the United States showed substantial growth versus a year ago, but a deficit is still a deficit, and that doesn’t change unless the Japanese government permits a move back towards nuclear power generation. The bottom line is that the weak yen boosts the import bill, and aggressive quantitative easing will continue to exacerbate the problem. Still.. business sentiment in Japan has improved somewhat according to the latest Reuters Tankan report, which makes sense given the modest recovery from the recent sales tax inspired slump, there’ll need to be more than this to justify Mr Abe’s efforts. Looking at the USD/JPY chart, the Elliott Wave Theoretician in me, believes that the currency pair will continue to consolidate for another week or two, possibly declining to the 116 – 117 zone before a 5th wave impulsive move higher challenges the 2007 highs.
Interestingly the timing of my speculations about a stronger USD/JPY might fit in with when EUR/USD should emerge from its current range trade. I still believe a spike higher to the 1.15 – 16 zone is possible, before EUR/USD makes new multi-year lows. The hope will be that the Eurogroup meeting tomorrow will be more successful than the one which broke down on Monday, but everyone’s eyes will be focussed on the 28th of February when the current bailout programme expires. Failure to agree an extension or new terms before this date is what could drive the euro to new lows. This will not play well to general risk sentiment, as the worst case scenario puts Greek membership of the Eurozone into question.
A decent sized drop in oil prices yesterday, and selling pressure has continued in early sessions today. It’s premature to suggest that the ‘dead cat bounce’ is over, but it just might be. As I’ve mentioned a few times, after the impulsive collapse last year, I would expect crude to trade in a fairly large range over the next year or so.. $30 – $70 is rather wide, but that range should contain the price action. This will force budget cuts and economic retrenchment in producer markets, but support consumer growth as well. As always for every cloud, there is a silver lining if you look hard enough!
Finally.. the UK continues to follow a similar path to the United States. Unemployment continues to decline, and wage growth was solid according to the data published yesterday. If you recall the inflation numbers from the day before yesterday had resulted in sterling weakness, but yesterday’s events seem to have put a floor under pound sterling:
- the solid employment numbers (more people found work in the UK last year than at any time since 1988);
- the fact that wage growth exceeded inflation for the fourth consecutive month;
- and signs of splits amongst rate setting decision makers at the Bank of England.
I make no secret of my view that lower inflation right now is energy price related and is thus transient. I believe the Bank of England should pay more attention to accelerating wage growth. As a central banker, there are few things as embarrassing as being behind the curve! The UK data continues to support our view at ParityFX, that EUR/GBP will continue to trend lower in the bigger picture.
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