IB FX View Japanese car wreck Monday July 13, 2009 Demand for both dollars and yen remained firm to start the trading week as ongoing fears over the global recovery grew. This data-heavy week will reveal more about the state of the recovering health of corporate America, while traders will be swift to react to inflation and retail sales readings. The Japanese yen is firmer at ¥92.33 against the dollar after Economics Minster, Yoshimasa Hayashi likened the Japanese economy to the advanced stages of a car wreck, while the nation’s ruling political party quietly imploded over the weekend bringing on an August General Election. Click on link for updated table throughout the day at http://www.interactivebrokers.com/en/general/education/FX-View.php?ib_entity=llc The loss of a municipal election in Tokyo was, for the ruling Japanese LDP body, the straw that broke the camel’s back and forced unpopular Prime Minister Taro Aso to bring a mandated October election date forward to August 30. The Japanese are accustomed to political turmoil having already gone through four LDP leaders in as many years. Political change achieves little for a nation mired in recession, and so today’s reaction in the currency markets saw little respite in appetite for the yen. However, the government also upgraded its economic assessment today making the third consecutive upbeat monthly report and the first time in seven years it has upgraded the overall economic picture three months straight. The government’s private consumption stimulus has helped spending, while an inventory currently appears to have run its course. The boost to Japanese exports from overseas demand, while uncertain in its longevity, has also helped optimism for a longer-lasting recovery. Under the terms of the stimulus plan, the government has engineered demand for low-emission cars and energy efficient flat-panel TVs and other domestic appliances. Consumers rushing to buy such items become eligible for subsidies under the government plan. While the broad thrust of today’s report was positive it did come with a warning that spenders may yet retrench given the pattern of rising unemployment as companies cut back on spending. Economics Minster, Yoshimasa Hayashi said, “You could compare the economy to being in a car accident. We’ve had surgery and now is the time to slowly recuperate. Exports are recovering and government stimulus is slowly working, but the overall situation is still severe,” he noted to reporters. The yen continues to firm and is ebbing and flowing against the euro at ¥128.75. It would appear overall that the yen’s status as a safe haven currency goes undaunted by political risk. And at this stage, better prospects for an economic recovery of its own appear to be bolstering the yen. Stock prices in Europe began the day on the defensive ahead of the U.S. opening, with fears mounting over the prospects for a return to banking losses. The euro has lost ground to the dollar at $1.3920 to start the week. London’s Sunday Times has always had an uncanny knack of unleashing Monday morning turmoil on the financial markets. Last week its prediction was that the Bank of England would expand its bond buying spree and while that was not true last week, it’s a move that will likely unfurl by the time of the August meeting at the central bank. This weekend the newspaper unleashed its fury on deeper financial woes at one of the nation’s largest banks, Lloyds Banking Group Plc. The article forewarns that when the bank reports half-yearly earnings in three weeks time, it will reveal a further $21 billion in losses related to non-performing loans. The article is interesting in that it’s the cause of a weakening pound this morning at $1.6097, while one euro today buys 86.53 pennies. Lloyds banking Group is now 43% owned by the British government after the financial crisis crippled its capital base. In that sense the news is slightly diluted. However, what’s crucial here is the wider ramifications for the financial sector where it is widely assumed that the storm had passed. Later this week, consumer prices will be announced for June in Britain while a further 41,300 job losses are to be expected for the same month after losses of 39,300 in May. The Australian dollar is weaker this morning as the price of gold dips while the Canadian dollar is flat at 85.79. Last week marked the fourth straight weekly loss for the unit following a sharp 19% drop in the price of its main export, crude oil. Relatively, the Canadian dollar has remained firmer than the Aussie unit as risk aversion played out throughout the week. Canadian investors await two key government reports later on Monday morning, which will illuminate the better lending and retailing conditions over the last several weeks. Andrew Wilkinson Senior Market Analyst ibanalyst@interactivebrokers.com Note: The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities or other financial instruments mentioned in this material are not suitable for all investors. 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