There are no big themes dominating the news today. So it is a perfect time to hit a couple of themes with an economic and market theme approach. Let’s talk banks, Japanese trade, the currency wars and deflation.
I haven’t posted to the blog portion of Credit Writedowns for some time because my schedule has been filled producing the finance show Boom Bust on RT. So I apologize for not having a lot of content for you. Last week, I hosted my first complete show on the TV show I produce called Boom Bust because the anchor, the wonderful Erin Ade, was out sick. It’s on currency boards and bottoms up investing. I also do a bit of a monologue on Apple.
The US dollar is consolidating yesterday’s gains that were scored largely in response to Draghi’s revelation that QE and a negative deposit rate were discussed at the ECB meeting. The consensus expects that the US economy grew 200k jobs last month and that the unemployment rate ticked down to 6.6% from 6.7%. In addition, the ISM for the service sector saw a strong recovery, providing new information we did not have at the start of the week. The bottom-line here is that US economic growth picked up in late Q1.
The US dollar is narrowly mixed, largely within its well-worn trading ranges against the major currencies with two exceptions. There have been several marginal developments over the 24 hours that are shaping the investment climate.
We view Q1 2014 as a potential turning point for EM this year, just as the May 22 Bernanke speech on tapering was last year. In recent weeks, EM has digested the start of Fed tapering, devaluations in Argentina and Kazakhstan, the Crimean crisis, a deeper than expected China slowdown coupled with a shift in its FX regime, and now potentially earlier than anticipated Fed rate hikes.
This is a loaded topic. This entry, however, is not intended to be political. Very few things in economics are good or bad in themselves, but rather can be good under certain conditions or bad under others. I want to try to tease out as logically as I can the conditions under which rising income inequality can be good or bad for the economy.
Weekend developments will dominate the first part of the week ahead. Two developments stand out. First, China announced a doubling of the permissible band from 1.0% to 2.0% around the daily fix. The PBOC deliberately and preemptively facilitated the narrowing of onshore and offshore yuan interest rates to avoid a new influx of capital that might have been spurred by the widening of the trading band. The second development over the weekend was the Crimean referendum.
The PBOC announced a band-widening for USD/CNY over the weekend, doubling the allowable band around the fix rate to +/- 2%. Off of Friday’s fix, the new band is 6.01-6.26 vs. 6.07-6.20 previously. The USD/CNY band was last widened in April 2012 from +/- 0.5%, and before that in May 2007 from +/- 0.3%.
US data have been better
European periphery market access continues to improve
Dollar weakness may be China-related
Gold continues to get safe haven bid
China’s slowing more likely to be abrupt
Ukraine has become a military issue; contagion will increase
A full-blown emerging markets crisis is now likely
Remember that the rest of the world has so far accepted the experiment that is Abenomics not only because Japan has been running a current account deficit (thus making it more reasonable for Japan to weaken its currency), but also because the depreciation has so far been orderly. With a growing negative current account, the wheels are now set in motion for a decidedly disorderly depreciation of the JPY and one that could ultimately be life threatening for the Japanese economy.
By Marc Chandler There is a common perception that Russia move on Crimea shows its strength. A closer examination suggests it is more complicated that it may seem. Like the bully at the school yard, the aggressiveness conceals weaknesses. Simply put, Russia felt threatened and for good reason. The democratic coup in the Ukraine threatened a potentially strategic loss for […]
Japan has just decided that Bitcoin is not a currency, which subjects it to sales and income taxes. This is consistent with the view of the Canadian Revenue Service, which has found Bitcoin to be property and not a legal currency, and the United Kingdom, which leaning towards treating Bitcoin as a voucher and subject to VAT.