FinancialMirror.com
January 9 - 15, 2013
22 | WORLD MARKETS
Race for weakness to see euro, sterling gain in 2013 l
Fed and BOJ asset buying to undermine dollar, yen, while yen “carry trades” may drive currency markets in 2013
The yen and dollar face a tough 2013 as the Japanese and U.S. central banks print money furiously to stimulate their economies, making the euro and sterling unlikely relative winners despite Europe’s gloomy prospects. With a global economic recovery looking shaky, analysts say the major central banks will be happy to see their currencies weaken this year if it helps their exporters to become more internationally competitive. This could trigger a round of competitive devaluations among the world’s most heavilytraded currencies, with Japan a likely winner in this race for weakness as its new government tries to end decades of regular recessions and deflation. Currency forecasting is notoriously difficult and movements often seem at first to lack logic. For instance the euro rose 1.8% against the dollar in 2012 despite the threat of a euro zone break-up, although the gains followed a European Central Bank promise to safeguard the currency union. Undaunted, analysts expect the yen to be the worst performer, while the dollar may lag the euro and the pound even though the United States is likely to outperform the euro zone and British economies in 2013. This is because the U.S. Federal Reserve plans to flood markets with a trillion dollars in stimulus this year by buying mortgage and government bonds, pushing down the value of the U.S. currency. Similarly, the Bank of Japan is preparing to pump trillions of yen into its stagnant economy. Their actions should outstrip any similar move by the Bank of England, which has paused its printing presses, or the ECB. In the foreign exchange market, where a currency is always valued relative to another, a fall in the dollar or yen will push the euro and sterling higher. “Major central banks printing more money and debasing the most liquid currencies is a major theme that will play out in the currency market this year,” said Tom Levinson, FX strategist at ING, referring to the Fed and BOJ. Some investors will not necessarily trade one major currency for another and instead opt for the likes of the Australian dollar. “What this liquidity injection will spark is a push towards less liquid and more risky currencies,” Levinson added.
Flooding markets with dollars and yen will help to gloss over any weakness in the euro and the pound caused by the struggling economies of Europe. “Central bank action, especially that of the Fed and the BOJ will help paint over cracks in the macroeconomic picture, both in the euro zone and UK,” said Jane Fol ey, senior currency strategist at Rabobank. “Currencies will not move in a straight line. But we expect the euro to rise against the dollar to $1.35 in the medium term. The dollar will generally have a poor year, as will the yen.” The euro is trading now around $1.3050, having gained rapidly after the ECB conditionally promised in the late summer to buy bonds of struggling euro zone countries, should their governments seek international aid. Since then, no government has requested a bailout and Spain says it does not need help at the moment. However, should the ECB start buying bonds, its programme would differ significantly from those of the Fed or BOJ. Its objective would be to help governments continue borrowing commercially at affordable interest rates, rather than stimulating the euro zone economy. With Germany wary of anything that might be inflationary, ECB policymakers have promised not to crank up the euro printing presses. Any money spent on bonds would be “sterilised”, meaning the ECB would withdraw equivalent sums from the banking system. Early signs of the trends forecast for this year are already apparent. The euro rose 15% against the yen in 2012, hitting a 1-1/2 year high this week. The pound stands at multi-month highs against the dollar and yen, mainly because of the dollar and yen weakness and not because of a British economic turnaround, traders said.
CARRY TRADES
The Fed has already made heavy asset purchases which have expanded its balance sheet. Some Fed policymakers have expressed concern about the long-term risks of this, even though they look set to continue the openended stimulus programme for the moment. John Normand, head of global FX strategy at JPMorgan, said the Fed and BOJ actions would boost the balance sheets of major central banks by about 10% this year, on a par
with the pace seen in 2012 when both the yen and the dollar lagged the euro and sterling. The large cash injections have prevented a sharp contraction in economic activity and restricted swings in foreign exchange markets, making it harder for investors to make money in the most traded currencies. That has driven many to take bigger positions in the less liquid and riskier currencies and Normand said the flood of liquidity in 2013 will ensure investors keep using “carry trades” in the search for higher returns. In carry trades, investors such as hedge funds borrow money in the more liquid and low interest-bearing dollar and yen to buy higher-yielding currencies like the Australian dollar . Reflecting the expected slide in the yen, it will emerge as the favourite funding currency in 2013, analysts said. “We would expect the yen’s use as a funding currency to broaden in the coming year,” Morgan Stanley said in a recent report, forecasting the dollar to rise to 90 yen in the coming months from around 88 yen on Friday.
DOLLAR WEAKNESS
While the yen and the dollar are likely to struggle, any glimmer of recovery in the euro
zone and Britain - where investors have priced in expectations of a prolonged slowdown - could give both the euro and the British pound a fillip. BNP Paribas strategists expect sterling to outperform the euro and the dollar. The bank expects the euro to drop to 80 pence in a few weeks, from around 81.20 now, and forecasts sterling at $1.68 in coming months, from $1.60, once global recovery gathers pace and UK exports pick up. While the euro may lag the pound it could rise against the dollar, drawing support from the ECB’s promise to do whatever it takes to preserve the euro and the fact that the Fed will be pumping in more dollars. “What looks absolutely assured is that in the first half of 2013, the Fed’s balance sheet will expand significantly more than the ECB assets,” said Alan Ruskin, macro strategist at Deutsche Bank, adding this was likely to lead to a lower dollar. Ruskin expects the ECB’s balance sheet to shrink slightly by 100 bln euros until it starts any bond purchases. “While uncertainties remain in the euro zone, as well as a weak growth outlook, we view the euro is likely to remain supported and reach $1.35 by end-Q1,” BNP Paribas said.
Spanish unions brace for more bank job cuts Spanish banking unions are braced for thousands more job cuts this year, starting with redundancies at Spain’s largest bank Santander after its merger with subsidiary Banesto. Unions said on Friday they expect between 3,000 and 4,000 jobs to go as a result of the merger and would hold talks next week with the bank. With 6,000 jobs also going at Bankia and thousands of redundancies at other nationalised banks, the year has started on a gloomy note for many workers in Spain where around one in four of the workforce is already jobless. In the financial sector alone, banking unions estimate 12,000 job losses this year, on top of about 35,000 cuts since the middle of
2008 when Spain’s property crisis began to grip the industry. Spain has received 40 bln euros in European aid to restore its financial system, but as a condition of the aid - much of which will go to nationalised lenders including Bankia - troubled lenders must cut more jobs and sell assets. Santander last month announced plans to fully absorb its 110 year-old Banesto brand, closing 700 branches to cut costs and help position itself for any further downturn in Spain’s sickly banking sector. The bank had warned of job losses stemming from the branch closures after the Banesto tie-up but said they would be implemented gradually.
FINAL FIGURE
“We’ll start to talk about the cuts with Santander this week. The bank hasn’t confirmed any numbers, but we think the final figure will be closer to 3,000,” said Jose Miguel Villa, secretary general of the services federation for Spain’s second-largest union UGT. A Santander spokeswoman said the bank will meet with unions on January 9 but would not give any further details such as on the scale or timing of any reductions. Santander has said that the job cuts would be made through early retirements, incentivized departures and transfers to other units of the group. The bank was one of the best performers on Spain’s blue chip index last year, rising from
around 5.26 euros at the end of 2011 to close the year at just over 6 euros thanks to its handling of the financial crisis.Almost every day brings fresh unemployment news in Spain, where on average 2,000 jobs were lost a day last year, a number that many analysts expect to rise in 2013 as struggling companies cut staff in a weak economy. “This is going to be a tough year,” Villa of UGT said. Unions will also begin talks with state-owned Bankia on January 9 over previously announced plans to lay off 6,000 of its 20,000-strong workforce, Villa said. In other sectors, Spanish airline Iberia is negotiating 4,500 job cuts - a quarter of its workforce - with unions as part of a wider restructuring it says is necessary for its survival.