Stronger yen after quake

(14.03.2011) In the wake of the earth quake catastrophe in Japan, yen has strengthened against the dollar. Agreement among euro leaders has lifted their common currency.

By Kjersti Haugland, Analyst at DNB Markets

japanese yenThe scope of the material damage caused by the catastrophic earth quake in Japan Friday morning is highly uncertain. In any case the financing must be done through Japanese insurance companies' selling of foreign assets and through more issuance of Japanese government bonds.

Both measures point to increased demand for yen, and hence the Japanese currency strengthened markedly on Friday. It has weakened somewhat again after Bank of Japan (BoJ) provided ample liquidity (7 000 bn yen) to nervous markets during the Asian session. In addition, BoJ eased monetary policy by raising the value of the asset purchase programme by 5 000 bn yen to 40 000 bn yen.

DNB Markets revised its oil price estimates upwards on Friday, due to increased risk premium connected to the geopolitical situation in North Africa and the Middle East, as well as stronger fundamentals. We now expect the oil price to be 105 USD per barrel in 2010 and 2011. During Friday's session investors' risk appetite increased as oil price softened when the anticipated unrest in Saudi Arabia failed to materialise. This contributed to lifting US stock markets.

The euro strengthened markedly after euro leaders agreed to strengthen its emergency fund on Friday. Because of requirement of sufficient collateral to gain top ratings, the efficient value of the fund has been significantly smaller than the fund's nominal value. As a result of Friday's talks the efficient amount available to potential borrowers has increased from 250 bn euros to 440 bn. More details will be discussed today.

Portugal announced on Friday that they will cut more in public budgets than previously announced in order to shrink its deficit sooner and regain market's confidence. With today's funding costs it is highly probable that the Portuguese will have to seek help from the emergency fund shortly.

Friday's US retail sales were uplifting. The 1.0% m/m increase in February was anticipated in the market, but there were also significant upwards revisions to growth the previous two months. Cuts in payrolls taxes have clearly contributed to lifting consumption.

At the same time the Michigan consumer confidence index fell to its lowest level in six months, signalling that high gasoline prices is weighing on the consumers. This factor may slow the positive trend in consumption going forward. Tomorrow's Fed meeting will probably provide us with few new signals. We expect that positive key macro data lately is balanced by surging oil prices, implying that the Fed sticks with QE2 as planned and stands firm on its commitment to keep rates low for "an extended period".

Norges Bank has an interest rate meeting on Wednesday, and will at the same time publish its Monetary Policy Report containing an updated interest rate path. We do not expect a hike at this meeting, but the central bank will probably lift its interest rate path somewhat. The main argument will be higher forward rates (and partially higher growth prospects) among Norway's trading partners. On the other side of the balance is a strong NOK and lower inflation than projected. Norges Bank will probably choose to put a 50/50 per cent probability of a hike in the May or the June meeting, to keep its options open.

While we wait for the minutes of the Bank of England monetary policy meeting Wednesday next week, the results from the central bank's own price expectations survey on Thursday may receive some attention. The decisive point for the board's future interest rate strategy will be whether the long-lasting high inflation has fed through to long-term inflation expectations or not.