» Asian Morning Update 22nd April 2008

Dollar drifts back lower in listless trading overnight

European news overnight:

With all economic releases done and dusted by early European trading there was nothing but comments and the BOE announcement to consider.

The joint Treasury BOE mortgage plan for the CB to swap GBP 50bn of banks’ (potentially risky) mortgage securities for government bonds is intended to allow banks to reduce margins on mortgage rates and help home buyers with being able to obtain financing.

There was mixed reaction from lenders some of whom thought the plan would have only marginal impact on current mortgage rates. Some consider it too little too late and others feel it will provide a needed stimulus to the market. However, no one believes this to be a panacea for the current financial distress.

From Europe came the normal, oft repeated comments on inflationary risks from ECB members. However, the underlying conflict the CB has remains – it still cannot hike interest rates while market liquidity is volatile due to the credit crisis.

While the Fed’s Plosser may have accepted that they have little control over inflation at present as food & energy prices continue to bite into consumers’ pockets, the ECB members still look for inflationary pressures to peak. This has been their standard view since the end of last year when the commonly offered statement was that these inflationary pressures were temporary.

They do voice their concern over the potential for wage settlements to add secondary inflationary pressures and clearly urge for wage claims to be moderate. However, they should study the 1970’s oil crisis that led to widespread union unrest and finally the “winter of discontent” under Margaret Thatcher. Inflation ran into double digits at that time and didn’t decline back to normal levels until the mid 1980’s.

States news overnight:
     
From the States the Fed’s Kroszner commented that challenges still lie ahead for markets, the increased spreads reflecting the crisis of confidence that has gripped the banking sector. It is nothing new but does still warn us that another price shock could cause deeper damage to confidence.

And finally from Japan’s MITI Akira Amari commented on the “extraordinarily high oil prices” and warned, “I have been repeatedly stating my strong sense of crisis that the global economy would suffer a setback if these conditions are left as they are. Today, we are facing a serious risk of a global recession. In particular, resource-scarce developing countries are facing a severe situation.”

He also outlined a proposal that energy and financial experts, as well as futures market regulators, “analyze the realities” of the oil market in a bid to tackle speculation in oil trading. Many in the industry blame speculation, rather than a lack of supply, for oil’s record run.

“I believe these efforts will send a clear signal to the financial markets, which in turn is expected to encourage more level-headed behavior on the part of speculative money.”

And overall the market decided that Friday’s dramatic recovery in the Dollar just didn’t make much sense and the day saw a steady drift lower to end close to the lows.

In spite of this it is fairly clear that the sentiment for the Dollar has been nowhere close to the rabid bearishness that brought it lower since the turmoil began in August last year.

It is difficult to justify a higher Dollar though, except perhaps from the point of view of profit taking form short positions. Next month sees tax rebates being sent to U.S. households and a general belief that H2 while not seeing a dramatic recovery, should stabilize at the very least.

In the meantime Europe, while still seeing solid growth is slowing also and is not immune from potential price shocks. Thus, even if we see marginal new lows in the Dollar against the Euro the chance of this occurring against the Swiss Franc, Yen and Pound is very low.

Therefore the potential for a larger reversal higher for the Dollar remains.

More later once the daily analysis has been done…

The following releases are due from Asia due today:

Japanese March Supermarket Sales (YoY) +1.9% (prior)

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