FX: S&P Talks EZ Downgrades, US Jobless Claims Distortion

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The big story today is the euro, which has fallen nearly 1% against the U.S. dollar. Weaker than expected fourth quarter GDP numbers led the decline as the technical recession in the Eurozone deepened. Not only did the Eurozone contract for the third quarter in a row, but growth in the region has fallen 4 out of the last 5 quarters with the contraction in Q4 of last year being the deepest since 2009. While the outlook has brightened this year, the disappointing data still led to a round of sharp profit taking in the EUR/USD. Another reason why the EUR/USD is under pressure is because Moritz Kraemer, S&P’s Managing Director of European Sovereign Ratings said Spain, Italy, Portugal and France could be downgraded this year.

Better than expected U.S. jobless claims failed to support the EUR/USD or USD/JPY. Jobless claims dropped 27k to 341k this week, which was the second lowest reading for claims since Jan 2008. Continuing claims also fell to 3.114 million from 3.24 million, the lowest level since July 2008. Yet the reason why investors ignored these stronger numbers is because the Labor department “estimated” claims for Connecticut and Illinois. The last time the government estimated claims was in back in January when claims fell to 330k and rebounded sharply the following week.

Meanwhile the G20 meeting has begun and the Japanese Yen is at the front and center of discussions. While Russia, France and Korea are looking for “specific language against FX market intervention,” we know that at least 9 of the G20 nations have no problems with Yen weakness and they are some of the heaviest hitters. This includes countries that have recently intervened in their currencies such as Brazil, Argentina and China. Others such as the U.S., Japan, U.K. and possibly Australia favor using monetary policy measures to weaken their currency while Germany and Canada have no problems with Yen weakness. Yesterday, Canada’s Finance Minister said the G7 statement was a consensus statement that was not meant to single out Japan and we think the G20 shares this view. While there’s no question that the volatility in the Yen has been higher than other currencies and it has weakened more substantially, Japan is not the only country guilty of taking steps to debase its currency.

At the end of the day, we don’t expect any substantial changes to the exchange rate language in the G20 statement. In fact it will probably read very much like the G7 statement on currencies that reaffirmed their prior stance and added a new line reaffirming that “fiscal and monetary policies have been and will remain oriented towards meeting our respective domestic objectives using domestic instruments, and that we will not target exchange rates.” If that is all the G20 says, USD/JPY could renew its rally but we will have to wait till Friday to know definitively. In the meantime, BoJ candidate Iwata said overnight that 90 to 100 would be equilibrium for USD/JPY – which is a level that we should remember if he is elected BoJ Governor.

Kathy Lien
Managing Director

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