[Obsidian]

Europe's worsening economic picture suggests that the euro could fall further against the yen in the coming months, possibly as much as to near Y90, but Japan's government shouldn't try to fight the euro weakness through market intervention as the trend is too strong for such action to have any meaningful impact, a former top Japanese currency official said Friday.

"There is nothing wrong with the euro's declines, as European economies are set to contract," amid the sovereign debt crisis in the Continent, Eisuke Sakakibara, former vice finance minister for international affairs, also known as "Mr. Yen."

"Europe's economic conditions are extremely bad. It is just natural for the euro to weaken. It would make no sense if you intervened (to push the euro higher versus the yen)."

There is "a very high possibility" of the euro slipping below Y95 within six months, he said. "There is also a possibility of it temporarily overshooting to fall to near Y90."

Sakakibara added: "Europe would oppose (Japanese intervention). There is no doubt about that. So an intervention would be ineffective. Interventions are ineffective unless they are coordinated."

Rather than try to fight the euro's fall, the Japanese government should consider ways to take advantage of the yen's strength, such as making more efforts to promote the buying of European companies by Japanese firms, he said.

Source: Dow Jones

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[Obsidian]

The Swiss National Bank will defend the 1.20 Swiss francs per euro floor for as long as it deems necessary and the resignation of president Philipp Hildebrand earlier this month won't affect the direction of monetary policy, the Swiss central bank's interim head Thomas Jordan said in a newspaper interview published Friday.

[Obsidian]

Global hedge funds are starting to make big returns from borrowing in euros and investing in higher-yielding currencies like the Australian dollar. If it keeps going, the dollar could soar through its previous highs and beyond.

The euro is looking like a one-way bet as the eurozone economy enters recession. The European Central Bank is likely to cut official rates below the current 1 per cent rate and policymakers across Europe are keen to see the euro fall to improve the competitiveness of European industry.

It means a huge speculative euro carry trade is re-emerging, comparable with the yen carry trade of last decade that underpinned, among other things, the growth of US subprime lending up to 2007 as well as the banking bubble in Iceland and the property bubble in Ireland.

By early 2007 it’s estimated that at least $1 trillion was riding the yen carry trade, with Japanese interest rates at zero and the yen itself weakening.

The euro has fallen more than 4 per cent in three months and with the President of the ECB, Mario Draghi, having reversed the “tight money” strategy of his predecessor Jean-Claude Trichet with two 0.25 per cent interest rate cuts so far, most economists now predict another official cut within months to 0.75 per cent.

According to Bloomberg, when the ECB held the official rate steady at 1 per cent for two years up to April 2011, hedge funds made a return of 27 per cent borrowing in euros and buying Australian dollars, Brazilian real, South African rand and Korean won.

That trade reversed after April when Trichet disastrously tightened monetary policy between April and November last year. But now the euro carry trade is back on as funds regain confidence that eurozone interest rates are heading lower and so is the euro.

The effect of the comings and goings of the euro carry trade can be clearly seen in the Australian dollar. Between 2009 and April 2011, the AUDUSD exchange rate rose from 64 US cents to peak at $US1.10 on May 2 – a rise of more than 70 per cent.

It then fell back to below parity late last year as the carry trade was partially unwound and is now rising again following two ECB rate cuts. If this goes on – and there seems no reason to think it won’t – the Australia dollar will see $US1.10 again, and more, and Australia will start to have a new speculative capital inflow problem.

This country already has a huge schedule of capital investment in mining and energy projects over the next few years, and if this is augmented by a lot of speculative money funded by the euro carry trade, the currency could rise beyond anyone’s expectations.

This would obviously worsen what is already shaping up to be a difficult employment problem caused by the strong Australian dollar, which is leading to falling manufacturing exports and big consumer spending on overseas travel and online shopping.

Source: businessspectator.com

[Obsidian]

The Euro entered the session on a cautious note as the Euro Zone Fin Mins were set to meet later today to decide what terms of a Greek restructuring they were willing to accept. Negotiating a debt swap with Greece creditors made their 'maximum' offer, leaving it to the EU and the IMF to decide whether to accept the deal. The question remained whether Greece would apply a collective action clause, which can force creditors into a write-off. Nonetheless dealers noted that the net Euro short positions hit its fourth consecutive weekly high and helped the EUR/USD recoup its initial losses exhibited during the Asian session.

Source: TTN


EUR given a lift by a collection of statements from Europe suggesting that some sort agreement on Greece is taking shape. There was a statement that Germany might have become more felexible on the ESM. The EU's Barnier said that no EU Financial Transaction Tax will be imposed on any European country.

[Obsidian]

Scrapping Australia's floating exchange rate policy to help manufacturers hurt by the surge in the nation's currency in recent years isn't an option, according to the government.

A floating exchange rate will remain the policy even though the government expects the Australian dollar to remain high for some time, Kim Carr, Minister for Manufacturing, told reporters today. His comments came as the Australian dollar overnight soared above $US1.05 for the first time since October on renewed optimism Greece would reach a deal with its creditors to avoid defaulting on its debt.

"We've worked on the basis that we should have a floating exchange rate and that's been the position now for a very, very long period," Mr Carr said. "The government doesn't intend to change that position. We won't be intervening in regard to the price of the Australian dollar, we can't re-regulate the economy, we're not going to."

While the resources sector is undergoing a boom, concern is growing key parts of the rest of Australia's economy risk being crippled by a currency that has risen close to 75 per cent from its 2008 lows.

Toyota yesterday said it was laying off 7 per cent of its Australian staff, blaming pressures including the strong Australian dollar and a weakening export market.

"We're seeing the Australian dollar at record levels, that won't always be the case," Mr Carr said, while defending the government's co-investment in domestic auto manufacturing and other sectors. "We know the dollar is likely to remain high for some time, but at what level we can't tell."

Source: theaustralian.com.au

[Obsidian]

Gold investors are turning cautious after recent gains with the yellow metal slipping in Asian trade, says IG Markets analyst Stan Shamu. "We are seeing some nervous trading and some are locking in a bit of profits after a solid start to the year," Shamu says. He notes that the delay in getting an agreement on the Greek debt restructuring, is making some investors nervous. He says that investors remain focused on news out of Europe and the U.S. Federal Reserve's meeting this week. Shamu says that some analysts expect the Fed to announce some monetary easing. "That could really be a game changer depending on what sort of indication they give," says Shamu. In the near-term, gold prices could consolidate at their current levels amid subdued trading due to the Chinese Lunar New Year holiday, he adds.

Source: Dow Jones

[Obsidian]

Bank of Japan (BoJ) leaves target rate range unchanged between 0.0% to 0.10% as expected; lowers GDP forecasts and economic assessment...

BOJ Statement on Monetary Policy: http://www.boj.or.jp/en/announcement...2/k120124a.pdf

[Obsidian]

The latest data released by the Australian Bureau of Statistics showed that the Consumer Price Index was unchanged in the December quarter 2011, compared with a rise of 0.6% in the September quarter 2011. CPI rose 3.1% through the year to the December quarter 2011, compared with a rise of 3.5% through the year to the September quarter 2011. The most significant price rises this quarter were for domestic holiday travel and accommodation (+7.3%), rents (+1.0%), telecommunication equipment and services (+1.1%), beer (+1.2%) and automotive fuel (+0.7%). The most significant price falls this quarter were for fruit (–13.4%), pharmaceutical products (–5.6%), vegetables (–5.0%), audio, visual and computing equipment (–3.4%), international holiday travel and accommodation (–1.9%) and motor vehicles (–1.2%).

Source: Australian Bureau of Statistics 6401.0 - Consumer Price Index, Australia, Dec 2011