Green Un-Backed: Dollar reaches all time low against the Yen

The Japanese Yen reached a record high against the dollar today in the run-up to Eurozone crunch talks. The increasing likelihood of a further round of quantitative easing in the US also added to concerns.

The Federal reserve's plans are thought to include a widespread purchase of mortgage-backed securities in an attempt to kick-start the staggering housing market.

With gold growing increasingly volatile in this last couple of weeks and the Swiss central bank pursuing its efforts to weaken the Franc, the Yen is fast becoming the only currency investors are willing to hold.

It is thought that selling the dollar is, for many, effectively a bet against a resolution to the Euro crisis, as a global recovery seems increasingly likely to be America’s greatest hope of weathering the current storm.

Eurozone leaders are unlikely to make any headway at the first meeting in Brussels so markets may have to wait as long as until Wednesday for any meaningful conclusions.

Attentions must now surely turn to the Central Bank of Japan. The strong Yen is causing companies to leave in their droves, draining millions from their economy in the process. Be it a direct market intervention in the mould of Switzerland’s intervention, or a less explicit monetary approach involving quantitative easing, Japan must act to devalue the Yen or risk another ‘lost decade’.

Downturn down Under?

Fears mount over the stability of the Australian banking system.
A sharp increase in the cost of insuring an Australian bank default has taken markets by surprise this week. While Australian banking sector shares have performed well up until now, credit default swap premiums have been climbing since August according to the latest data release from The Reserve Bank of Australia.

CDS premiums for Australian lenders have climbed above those for US, Canadian and German banks but have not yet matched the rise experienced by several French banks earlier this quarter.

It is thought concerns may have originally arisen over Australia’s external funding sources and its exposure to the European sovereign debt crisis.

This does beg the question however, why should we be more concerned over Australia’s exposure to Europe than of the UK’s? Or the US’s ?

Bundestag-Do

On Thursday Angela Merkel’s proposal to increase both the size and the number of applications available to, the European rescue fund, was accepted in the Bundestag. The EFSE is now thought to stand at around $600m and this week’s developments may prove vital in Angela Merkel’s attempts to quash widespread public scepticism over Germany’s role in the rescue mission.

The Euro rose to a week-high against the dollar following the news, before slipping back to near pre-release levels. The original euphoria no doubt spread from the simple phenomena of Angel Merkel actually doing something, following an explosively passive six months for the leader of the Christian Democratic Union.

Negative sentiment was rife among markets however, with WSJ calling the expanded fund “more bad money covering up more bad loans”.

It would appear that the European Financial Stability Fund does begin to address the worrying symptoms presented by Europe’s periphery, while doing little to address the root cause of the current financial woes of Greece and co. Perhaps more radical reform incorporating joint issued European government debt, a one-size-fits-all income tax structure imposed across the region, or a synchronised European public pension fund, coupled with a more nurturing monetary stance, is the way forward for Europe if the situation continues on its current path.

99 Problems But A Bond Aint One!

Youth unemployment is at its highest for twenty years, economic growth teeters above zero and inflation is double the official target. So why, in one respect, are we the economic envy of the Western world?

The holy-grail of government finance, the AAA rating, eluded America this summer. Standard & Poor’s decided that a $14.3trn current deficit was enough to swing the balance out of Obama’s favour. Yet the UK clings on to the coveted credit credential.

And while the fiscal difficulties of the Europe’s periphery are no secret, it emerged this week that France is at risk of a downgrade and even the Wirtschaftswunder came under fiscal-fire.

The UK appears to have emerged as an unlikely safe haven for holders of government bonds, with yields falling to 2.5% last week, an all-time low. This means lower debt repayments for the UK government and, ultimately, for the tax payer. Combine this with the erosive effects of 5% inflation and our national debt appears ever so slightly less crippling.

As One Story Ends

The US debt ceiling was finally raised this week, putting an end to months of long drawn out negotiation.  America is safe to go on spending, and holders of its debt can breathe a much anticipated sigh of relief. For now…

Both S&P and Moody’s  put America on a downgrade review last month and the successful debt deal will be unlikely to have much of an influence on this. America losing is AAA rating would poise 2011 to be a worse year for the global economy than 2008. 

Europe’s periphery teeters on the edge of sovereign default, The UK’s recovery is stuttering and the purchasing manager’s index revealed this week that global manufacturing slowed in the second quarter. Add a US downgrade to all this and you’ve got yourself a global double-dip recession.

Equity markets on both sides of the Atlantic have been shaky for several weeks now and one cannot help but reflect on the events of the three years ago. 

Seemingly these fears were shared by The Bank of England and The European Central Bank as both declined to raise interest rates this week, whereas base rates have been raised of late in both India and China in attempts to stave of inflation.

In spite of the breakthrough in Washington, the outlook for The US and indeed the world remains turbulent.

Two Sides of a Very Different Coin – Why bond markets are treating America like it can do no wrong and Italy like a second class citizen

Two economies, the fundamentals of both of which scream ‘panic!’ yet one is borrowing at next to nothing, while the other is being crippled by its debt repayments.

In April 2010, 10-year bond yields (effectively a government’s long term cost of borrowing) were higher in America than in Italy. However Italy’s bond yields rose above 6% this week while America’s stood firm at 3%. It is this high cost of borrowing that is at the root of many of Italy’s problems. Disregarding interest payments, Italy actually runs a budget surplus (known as a primary surplus). If Italy were able to borrow at the same rate as The US, its economic outlook would be closer to Germany’s than to Greece’s as it is at the moment.

These bond yields, looked at it in their simplest, suggests that the market perceives Italy to be much more likely to default on its repayments than America. Is this justified?

Yes: America is still regarded as a safe haven in times of economic turbulence, it provides a more investor friendly environment and, most importantly, is the home of the world’s reserve currency.
No: Both countries have government debt around 100% of GDP and Italy’s primary budget is in a better state than America’s.

The ratings agencies appear to be coming around to the idea that America is not in a great bill of economic health. Moody’s have said this week that there is a 50% chance that it will downgrade US Treasury debt in the next three months. There has been noise coming out of both S&P and Fitch to suggest that they too see a chink in Obama’s armour.

The most likely reason however, that in spite of all this, America is still borrowing at far lower rates than Italy, lies with Italy’s Euro membership.

The US has the freedom, as a last resort, to virtually buy its own debt through quantitative easing. QE3 is considered a very real possibility and would provide the Fed and the American government with some flexibility. Italy does not have this option. The ECB could, theoretically, fulfil this role however it is forbidden to do so by its founding legislation.

The issue of the benefits of Eurozone membership has rolled around once more. Were Italy, Spain or Greece for that matter, operating under monetary independence, with the ability to devalue their currencies and intervene in primary bond markets, would they be better off?