Since the beginning of the year, the Japanese yen has been on every investor’s mind. Indeed, as the Japanese government continues to show their commitment to a weaker currency, European leaders on the other hand are starting to show concerns about the yen and the negative effect it would have on European exports.
In the US, the recovery remains under way with jobless claims falling to a five years low this week. Equities also registered highest levels post the financial crisis, as the US House of Representatives passed a measure to postpone the debt ceiling deal by three month until May 19.
President Obama also did his share in offering hopes during the presidential inauguration speech, as he noted the US must remake the government, revamp the tax code and make some hard choices to reduce the cost of health care and the size of the deficit.
The good news continued during the week on the European side, after German Foreign Minister Guido Westerwelle said the eurozone has left the worst of its debt crisis behind, but its countries cannot relax and have to continue their fiscal consolidation efforts.
Overall, the data as of late has showed an improving activity outlook for the eurozone and the trend of growing balance of payments surpluses and falling budget deficits are structural and cyclical positives for the euro. The data out of Germany is leading the way and this could spill off into other countries as financial markets normalise and the reduced requirements for banks liquid asset holdings will allow banks greater capital to support trade finance. Market analysts are talking about a recovery in cross border lending as confidence has started to return.
The euro ended the week outperforming across the board, especially against Asian currencies. The currency reached a high of 1.3479 against the dollar while registered an increase of almost four percent against the yen.
The Sterling pound on the other hand continued its underperformance after Bank of England’s Mervin King noted that a lower Pound was beneficial for the UK’s economy rebalancing. The currency reached a low of 1.5746 against the dollar while it posted its lowest level for over a year against the euro.
Initial jobless claims in the US dropped to its lowest level in five years last week. The data suggest a stronger labour market and economic growth despite persistent pessimism in the market. Initial jobless claims fell 5,000 to 330,000 in the week ended January 19 representing a 1.5 percent drop from the previous week’s 335,000. The data were significantly lower than the average estimate of analysts expecting 355,000.
Beginning of currency war
Looking at a year earlier, Europe was in a much worse situation than where it is today. After risks of a break-up have receded, Bundesbank chief Jens Weidmann warned against relying on the European Central Bank as the only crisis manager. Indeed, he was quoted telling a newspaper earlier this week that its bond buyback program was risky. According to him, “Central banks in recent years have been pulled into the role of a crisis manager.”
The attention now turns over to Japan where European politicians have started criticising publicly the country, mentioning its engineering of a weaker yen and stirring a global currency war. The Japanese Vice-Finance Minister Takehiko Nakao replied that Japan has no intention whatsoever of competitive devaluation of the yen and the recent depreciation of the yen should be regarded as a correction from the one-sided and excessive appreciation that took place up to last year.
Divergence between German and French PMI Give an Unclear Picture of Europe
France’s manufacturing PMI was much weaker than expected in January, falling to 42.9 versus expectations of 44.98, and from 44.6 the month before. The number demonstrates that France’s manufacturing industry is shrinking at the fastest pace since the trough of the global financial crisis, in a new sign the Euro zone’s second biggest economy is in recession.
Germany’s manufacturing PMI on the other hand was stronger than expected at 48.8 versus expectations of 46.8, and up from 46 the month previously. The services PMI was also much stronger at 55.3 versus 52 consensus. The divergence between the French and German numbers was 6 points, but not unforeseen as similar divergences had occurred in the past as in 2010 and 2012, although they did not persist for more than 1-2 months. The composite eurozone manufacturing PMI rose to 47.5 versus consensus 46.6. Given the strength in Germany and weakness in France were roughly offsetting, this suggested that the peripheral PMI numbers were better.
German IFO beat estimates
German IFO Business Climate rose from 102.4 in December to 104.2 in January, exceeding economists’ expectations of an increase to 103.0. On the other hand, IFO Current Assessment grew to 108.0 in January, versus 107.1 the previous month and above forecasts of 107.2. Finally, IFO Expectations climbed to 100.5 from 97.9 and slightly above expectations of 99.
According to the ECB President Mario Draghi, 2012 had effectively marked the re-launching of the Euro and repeated that financial stresses had eased, although the economy continues to lag.
UK GDP shrank by 0.3 percent in the fourth quarter of 2102. The contraction, which was worse than most economists’ estimates, compared to a 0.9 percent rise in the previous three months. The statistics office also mentioned there was also some evidence of “fall back” following the Olympic Games in the third quarter. Industrial production fell 1.8%, while manufacturing dropped 1.5 percent. Construction output rose 0.3 percent.
On Thursday, Britain’s Chancellor told reporters during the world economic forum in Davos that the government would stick to its austerity plan, despite criticism from the IMF.
The Peninsula
