The online edition of the Wall Street Journal reported this morning has the following comment:
For the first time since they joined to rescue a sinking euro in 2000, the U.S., Japan, U.K., Canada and the European Central Bank Thursday night agreed to “concerted intervention in exchange markets.” The ECB manages the currency shared by G-7 members France, Germany and Italy.
Read this post in the attached pdf to view graphs and tables referred to in the article: Daily View: The world economy: Whither the Yen, the global economy and so the rand
The move came “in response to recent movements in the exchange rate of the yen associated with the tragic events in Japan,” according to a statement issued after a conference call among financial ministers and central bankers from the Group of Seven economies.
In early Asian trading after the announcement, the yen dropped to around 81.59 to the dollar from 79.19. When the earthquake struck last week, a dollar bought 82.80 yen. On Thursday, before the G-7 call, it hit a record of 76.25 to the dollar. Japan led Asian shares higher Friday morning, with the Nikkei Stock Average rising 1.8% as concern eased over the damage a rising yen inflicts on Japanese exports.
The intervention seemed to work, taking the Yen/US dollar back to its levels at the start of the week. Yen strength had been associated with a degree of rand and Aussie weakness versus the US dollar.
The crisis in Japan has had little influence on the rand. The rand has continued to move mostly in line with the Aussie dollar, also a commodity price influenced currency, and has weakened marginally against other emerging market currencies with which the rand is linked via portfolio flows. Our basket of emerging market (EM) currencies weakened marginally this week against the US dollar. Please note higher numbers indicate currency weakness.
On a trade weighted basis the rand had weakened by Wednesday and then recovered some of this loss on the Thursday. This has left the trade weighted rand almost unchanged over the past 12 months. By its own standards the rand on a trade weighted basis has been very stable these past 12 months though it was 10% stronger at year end.
The explanation of this currency stability, particularly that of the rand and its relationship with the Aussie dollar, is that the tragic events in Japan are not expected to weaken global growth, provided Japan can get back to work and rebuild its shrunken capital stock. This proviso has risen and fallen with sometimes conflicting news of radiation leaks from the fatally damaged Fukushima Daiichi nuclear facility. The benchmark event for analysts is the Kobe earthquake of 1995 which was followed within a year by a pick up rather than a slow down in Japanese growth.
Stock markets, more than currency markets, have gyrated accordingly as they have been forced to re-examine their outlook for the global economy in the wake of the quake. Judged by the relief rally yesterday the equity markets have reason to believe the worst may be over for the Japanese economy and the clean up and rebuild may proceed immediately.
The volatility priced into equity markets spiked sharply in response to the earthquake and Tsunami – but the Euro debt crisis of April 2010 was even more disturbing to the markets. That European governments somewhat surprisingly took further steps to intervene in the Euro debt markets last weekend, may have helped to soothe the troubled market breast.
A mixture of oil price shocks, continued anxieties about the solvency of European governments and devastation in Japan has severely tested the willingness of equity investors to absorb risk. That the markets have come through so far without greater damage is probably testament to good fundamentals and undemanding valuations.
We remain hopeful that the global economy has not been derailed by either the Tsunami or the oil price and that very good growth in earnings and dividends and undemanding valuations will provide generous compensation for the risks that equity investors have to absorb. Global economic strength will be good for commodity prices and so supportive of the rand.