Monday, March 14, 2011

Japanese Devastation!

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By Mike Conlon | March 11, 2011

Overnight Japan was rocked with an 8.9 magnitude earthquake AND a tsunami that has caused major destruction in the island nation. This is an extremely large earthquake for a country that is used to earthquakes; and this has caused tsunami warnings as far away as the West coast of the US.

This has induced some risk aversion, with oil prices pulling back to just above $100, and causing major strength in the Japanese yen as investors flee the equity markets. It is times like these when both the individual fundamentals and technicals can be thrown out the window as all bets are off. It is rumored that the BOJ will be holding an emergency meeting and will announce some type of monetary stimulus to help aid the economy, though that may be short-lived.

The death toll is rising and there is no telling what the aftermath of these natural disasters may hold.

How different currencies are reacting to this situation is indicative of some of the fundamental drivers, however.

The Pound is weaker across the board as PPI data came in lower than expected perhaps providing some relief form inflation. This would allow the BOE to maintain current accommodative policy.

The Loonie is also lower as crude oil has pulled back and the Canadian employment report showed a gain of 15K jobs vs. an expectation of 26K and the unemployment rate came in higher than expected to 7.8%.

US retail sales figures and confidence numbers are due out later this morning. Sales are expected to increase 1% and confidence is expected to come in slightly lower than last month.

In the forex market:

Aussie (AUD): The Aussie is mostly lower on risk taking this morning though there is some life in the currency as Chinese economic data came in slightly better than expected.

Kiwi (NZD): The Kiwi is actually higher against all but the Yen as the market is taking the long- term view that further rate reductions will not be forthcoming in New Zealand. It is also receiving money flows from the Loonie.

Loonie (CAD): The Loonie is lower across the board as oil prices have now dipped below $100 and the employment report came in worse than expected. (Click chart to enlarge)


Euro (EUR): The Euro is also lower as German CPI data came in as expected but apparently a showdown is in the making between Germany and the debt-laden countries of the Euro zone over the terms of the rescue package. This situation is far from over.

Pound (GBP): The Pound is also lower on PPI data which showed some relief from inflation by coming in less than expectations. Perhaps the BOE plan of waiting out the inflation may be working.

Dollar (USD): The Dollar is mostly higher on risk aversion and retail sales figures did indeed come in as expected at 1%, a 4-month high. Lost in all of the news about Japan is the Euro debt crisis and the situation in Libya and the potential contagion. Risk is still high despite equities markets trudging higher as there is no better investment alternative.

Yen (JPY): The Yen is higher across the board as money is re-patriated to Japan and demand will remain high once the rebuilding process begins. While it is difficult to know what the economic impact will be at this time, don’t be surprised to see the BOJ act swiftly to make money more readily available. (Click chart to enlarge)


Natural disasters such as this one remind us of our own humanity. Just in the time it has taken me to write this article, the death toll has risen to 300+.

From an economic standpoint, sometimes these events can change trends that were beginning to emerge or delay movement that we may have been expecting. Japan as a country is used to dealing with earthquakes so hopefully the devastation can be mitigated through their experience.

To learn more about how you can take advantage of world events through the currency market, be sure to check out our currency trading courses!

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