Paul Krugman: Elementary, My Dear Watanabe-san (Somewhat Wonkish)


 

OK, sorry about the bad translingual joke. But I thought it might be interesting to try doing a bit of deductive analysis on the sudden 7 percent plunge in the Nikkei.

One important thing to bear in mind, when it comes to big financial market moves, is that there may be no fundamental explanation at all. I’m old enough to remember the 1987 stock crash, which was followed by many theories about which policy move might have been responsible. As it happened, however, Robert Shiller managed to do a real-time survey as the market was plunging, and found essentially nobody mentioning any of the reasons later given for the selling wave. Instead, everyone said that they were selling because … prices were falling.

Still, to the extent that there is some fundamental story, what clues would we look for? And the answer, surely, is to ask what was happening in other markets, especially bonds and currencies.

Let me give you three different stories, each of which could explain a Nikkei plunge:

1. Fears about weak Japanese and Asian growth.
2. Fears about Japanese debt– the bond vigilantes have finally arrived.
3. Fears about the resolution of the Bank of Japan, its willingness to persist in very expansionary monetary policy for a long time.

All of these imply a fall in stocks; but they have different implications for bond and currency markets.

Story 1 should mean a fall in Japanese interest rates, since weaker growth should imply looser money for longer. Indeed, the recent runup in Japanese stocks and interest rates have gone hand in hand, suggesting that what we’ve been seeing is basically rising optimism. (Many of us have used similar arguments to wave away the claims that debt fears are driving occasional upticks in US rates). But in this case Japanese interest rates went basically nowhere.

Story 2 should have seen bond rates rising sharply, which they didn’t. Also, it should have meant a weakening in the yen — which actually rose significantly. So, not the bond vigilantes.

What about story 3? The impact of expected future monetary policy on long-term interest rates is ambiguous — rates might rise because they expect the BoJ to tighten, or fall because they fear that it will fail to end deflation. But worry about the BoJ’s resolve should have a clear impact on the yen, which should strengthen — which it did.

So to the extent that this wasn’t just markets doing their occasional panic thing, it looks like a sudden outbreak of concern about whether the Bank of Japan has really changed as much as it seems.

Elementary, My Dear Watanabe-san (Somewhat Wonkish) – NYTimes.com

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Week in FX Asia – Bank of Japan Doubles Bond Buying Weakens Yen


 

The Bank of Japan (BoJ) captured the attention of the foreign exchange world last week when it started to live up to the expectations of the market. After much anticipation, and lots of preceding rhetoric, Governor Haruhiko Kuroda announced the BoJ’s plan to double its bond buying efforts to reach the 2% inflation target in the allotted two-year window. It was his comments on Prime Minister Shinzo Abe’s inflation goals while still at the Asian Development Bank that might have won him the top job at the Japanese central bank. Earlier this week, the program kicked into gear and the JPY lost 4% versus the USD and 5% versus the GBP. The main beneficiaries have been Japan’s exporters and holders of Japanese stocks with the Nikkei Index reaching new highs on the value of the yen.

The decision has not been without its critics and some, such as George Soros, cautioned that the fall in the yen could be “an avalanche” that the BoJ could not stop if the Japanese people start to sell the currency. China and South Korea remain critical of the move, branding it a currency war before the Group of Twenty meeting last February. This week, the negative criticism persisted, but the words used were “monetary blackmail” instead of “currency war”. Those ugly words have not been uttered since the Group of Seven made it clear that as long as Japan’s monetary easing means are used for domestic aims, it does not imply unfair currency manipulation.



WEEK AHEAD

* CNY Real GDP
* AUD RBA Policy Meeting Minutes
* GBP Consumer Price Index
* EUR Euro-Zone Consumer Price Index
* EUR German ZEW Survey (Economic Sentiment)
* USD Consumer Price Index
* NZD Consumer Prices Index
* GBP Bank of England Minutes
* CAD Bank of Canada Rate Decision
* USD U.S. Federal Reserve Releases Beige Book
* CAD Consumer Price Index

Week in FX Asia – Bank of Japan Doubles Bond Buying Weakens Yen | OANDA Forex Blog

Week in FX Americas – When Will The Loonie Begin Its Real ‘Fall From Grace’?


 

Why is the CAD not any lower? Gold is off $60, crude is down $3 and Friday’s US data disappointed. As per usual, for an uninteresting currency that has been trading in a contained range so far this year, it is not surprising to witness a delayed reaction. The market should expect the loonie bears to come out of hibernation and finally want to sell some of their CAD dollars.

The currency bears will point to Gold’s long-term support levels been broken – there is danger that this move lower continues. The next real level of support for the yellow metal is around the $1475 area. It will be very interesting to see how the commodity bulls will react first thing next week.

There was no real news that sparked the Friday afternoon gold move lower. It feels like the commodity bulls finally lost interest and threw in the towel. Prudently, we should expect more investors to step aside so as to wait and see how far this market shake out progresses. Many have to be wondering what the logic is behind this move especially with central banks globally, and specifically Japan, ramping up the money printing.

With the lack of domestic developments, the CAD remains beholding to external headlines. With domestic order books remaining relatively thin topside, prices continue to find better bids on dips for now – however the game plan could change Sunday night.



WEEK AHEAD

* CNY Real GDP
* AUD RBA Policy Meeting Minutes
* GBP Consumer Price Index
* EUR Euro-Zone Consumer Price Index
* EUR German ZEW Survey (Economic Sentiment)
* USD Consumer Price Index
* NZD Consumer Prices Index
* GBP Bank of England Minutes
* CAD Bank of Canada Rate Decision
* USD U.S. Federal Reserve Releases Beige Book
* CAD Consumer Price Index

Week in FX Americas – When Will The Loonie Begin Its Real ‘Fall From Grace’? | OANDA Forex Blog

Week in FX Europe – EUR/JPY’s 12-Big Figure Move Dominates EUR demand


 

The EUR’s direction this week should have been influenced more by Euro fundamentals – but it was not. The 17-member single currency has ended up being pushed and pulled by a screaming yen that happens to be supported by the BoJ’s aggressive monetary easing program. In hindsight, this week’s asset and forex moves have more to do with the markets anticipation of what the Japanese investor will be doing and not what they are actually doing.

The EUR reached its “prudent” breaking point on Friday. This months EUR/JPY 12-big figure move beckoned long positions to take some profit off the table – with JGB yields rising instead of falling post BoJ is undermining this one directional trade. A healthy trade requires some breathing space and by booking profits for whatever reason – JGB’s getting slammed, headlines on Cyprus asking for more money or Italy needing to raise +EUR60-billion in more funding – that instigates an “orderly retreat” only proves the ‘worth’ in that overall trade.

It is a tad surprising that weaker US retail sales data and consumer sentiment did not produce more dollar buying against the EUR. The market seems comfortable buying EUR’s on dips, despite the daily technicals looking overbought. With not decent sign of a turnaround just yet, buying dips “safety in numbers” remains the number one course of action.

Next week it should be a quiet start to the week with no data from the UK or elsewhere in the Eurozone. There are no auction to even speak of, which should leave investors to ponder over what was said and not said at the Euro-finance ministers meeting in Dublin and possible event risk from North Korea.



WEEK AHEAD

* CNY Real GDP
* AUD RBA Policy Meeting Minutes
* GBP Consumer Price Index
* EUR Euro-Zone Consumer Price Index
* EUR German ZEW Survey (Economic Sentiment)
* USD Consumer Price Index
* NZD Consumer Prices Index
* GBP Bank of England Minutes
* CAD Bank of Canada Rate Decision
* USD U.S. Federal Reserve Releases Beige Book
* CAD Consumer Price Index

Week in FX Europe – EUR/JPY’s 12-Big Figure Move Dominates EUR demand | OANDA Forex Blog

Week in FX Americas – Boring Loonie Continues A Sideways Chop | OANDA Forex Blog


 

With no North American data to bully the loonie on Friday, the interest and commodity sensitive currency ended the week trading rudderless in another tight boring range. Many investors have shifted their attention to the euro-zone developments. Last Thursday, the 2013-14 Canadian budget was delivered amid little fanfare and with no impact on the CAD. The only thing of note was the reaffirming of Canada’s Triple-A credit rating, a recognized seal that is quickly becoming a rare attribute bestowed on developed countries.

After last weeks employment numbers, many investors were positioned and expected some modest bullishness from the currency. In hindsight, domestic macro drivers have been too mixed to give the loonie clear direction. Several analysts believe the divergence between Canada’s services and manufacturing sector will end up being temporary. With Canadian households remaining cash rich and a banking sector amongst the strongest globally, certainly favors the currency. Once the unknown Cypriot variable is played out and remains contained, the loonie should finally break out of its current range. For now, the sideways chop continues with range trading being the best strategy.



WEEK AHEAD

* USD Fed’s Bernanke Speech
* USD Durable Goods Orders
* USD Consumer Confidence
* GBP Gross Domestic Product
* CAD Bank of Canada Consumer Price Index Core
* EUR Unemployment Change
* USD Gross Domestic Product
* USD Reuters/Michigan Consumer Sentiment Index

Week in FX Americas – Boring Loonie Continues A Sideways Chop | OANDA Forex Blog