Daily Commentary: Dollar Recovers As BoJ Gets Worried

 | Feb 18, 2014 06:22AM ET

After its miserable performance last week, the dollar turned around and gained modestly against several currencies overnight. Its biggest gains were against the yen, after the Bank of Japan surprised the market by doubling one lending facility to JPY 7tn, and stating that individual banks can borrow twice as much low-interest money as they previously could under a second facility. While the efficacy of the move is questionable – companies already have record amounts of cash and deposits, so funding constraints are not necessarily a constraint on investment – nonetheless the move is a sign that the BoJ is concerned about Japan’s weak growth after the disappointing Q4 GDP data and is committed to supporting the economy as much as possible. That increases the likelihood that it will decide to accelerate its expansion of the monetary base after the consumption tax hike in April, which would be JPY-negative. Indeed, a recent Bloomberg survey shows 25 out of 34 economists forecast such a move will take place by the end of September, with 13 of those forecasting a move by end-June. I also expect that they will and that the move will further boost USD/JPY (that is, weaken the yen).

The AUD/USD was little changed after the release of the minutes of the latest Reserve Bank of Australia meeting. The minutes said the members “commenced their discussion of the domestic economy by focusing on the higher-than-expected reading for consumer price inflation in the December quarter,” which is not a good sign if you’re looking for further easing. About the AUD, they noted that it had depreciated further since the December meeting and said “if sustained, a lower exchange rate would be expansionary for economic activity and assist in achieving balanced growth of the economy.” This was in contrast to the statement in December, when they said that “members agreed that (the exchange rate) remained uncomfortably high and a lower level would likely be needed to achieve balanced growth in the economy.” In other words, the RBA felt at the December meeting (when AUD/USD was at 0.9122 the AUD TWI was at 69.7) that further depreciation was necessary, but by the time of the February meeting (when AUD/USD was at 0.8937 and the AUD TWI was at 68.6) that sufficient depreciation had been achieved. Personally I don’t think the decline in AUD since December has been that significant and I think the country’s terms of trade are still deteriorating. When I read reports about iron ore stockpiles in China reaching record highs, I can’t be optimistic about the AUD.

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