G7 - Spotlight on Asia

Yield Spread Analysis 01/30 – 02/06
Globally, yield curves generally inverted further or flattened slightly as longer term rates declined, erasing the gains we saw in the week prior. Japanese Government Bonds were the exception, however, ahead of the G7 meeting. The market is widely expecting commentary from finance ministers and central bankers alike regarding the recent weakness of the Japanese Yen.

As a result, traders are pricing in the possibility that the Bank of Japan will hike rates sooner rather than later, which would give the national currency a solid boost.
Looking forward, the market appears to be less confident that the European Central Bank and the Federal Reserve will raise rates this year.

G7 – Spotlight on Asia
While the Chinese Yuan has been the primary focus of discussions on currency weakness over the past few months, the declining value of the Japanese Yen has garnered some attention as well. Traders will be anxiously awaiting commentary from the G7 meeting communiqué:

Charles Schumer, US Senator (D)
“We’ve been talking to the Chinese for five years and we’re not getting enough results. The Chinese should know that Congress is exasperated and will act on a strong bill this session.” – February 1, 2007

Henry Paulson, US Treasury Secretary
“A major objective of my two remaining years as Treasury Secretary will be pressing the Chinese government to advance towards the goal of a renminbi whose value is freely set in a competitive marketplace, based upon economic fundamentals.” – January 31, 2007
“Maybe I’m looking at the yen a bit more carefully because of all the publicity coming out of Europe. The big point I made at the hearing yesterday was that in contradistinction to China, the Japanese have a currency that is traded in an open, competitive marketplace based on economic fundamentals.” – January 31, 2007

Hiroshi Watanabe, Japanese Vice Finance Minister for International Affairs
“I don’t think the (G7 meeting) will pick up the yen weakness specifically as an agenda item.” – February 1, 2007

Peer Steinbrueck, German Finance Minister

“A the G7 meeting exchange rates will be discussed, and that will include a discussion of the euro/yen exchange rate.” – January 30, 2007
BOJ – Cautiously Optimistic
The Bank of Japan and fiscal officials appear to be on the same page following the central bank’s decision to leave rates at 0.25%, as their commentary reflects concern regarding prices and spending, but overall confidence in their recovery:

Toshihiko Fukui, Bank of Japan Governor
“It is important to judge if the economy is in a position to maintain sustainable economic growth with stability of prices, and the Japanese economy is now heading in that direction. The chances that we will return to a deflationary spiral are slim.” – February 2, 2007
“The pace of rises in wages remains slow, and although personal consumption has been on a rising trend, the pace of increase is only modest. Data has been mixed, particularly personal consumption. As such, we needed to carefully analyze data. That is what led to our decision (to hold off from raising rates last month).” – February 1, 2007
"The chances are very low that the Japanese economy will fall into a deflationary spiral?I think the important thing is to appropriately judge if the economy is in a situation to continue a sustained recovery under price stability. I judge that it is taking a steady step forward in this direction.” – February 1, 2007

Hiroko Ota, Japanese Economics Minister
“Along with the effect of the warm winter, recovery in consumer spending is lagging. We need to watch this very carefully.” – February 5, 2007

Koji Omi, Japanese Finance Minister
“I hear that a G7 meeting is the place to talk about various issues. I don’t know what will be discussed this time … I would like to tell the meeting that Japan’s economy is recovering on stable prices.” – February 6, 2007
SNB – Resolutely Hawkish
The Swiss National Bank remains steadfast in their bias towards rate normalization, but is their rhetoric also an attempt to save the Swiss franc from the curse of the carry trade?

Jean-Pierre Roth, Swiss National Bank President
“The normalization of interest rates must continue…Our fundamentals are excellent. We have a strong economy, strong growth, no inflation problem and the franc is on a weak trend. This comes from the fact that markets are very short-term oriented. Fundamentals show that the franc is a strong currency.” – January 25, 2007
“We would definitely adjust our monetary policy should we think the property market poses a risk to the overall price stability of the economy.” – February 1, 2007

Thomas Jordan, Swiss National Bank Board Member Designate

“The weaker the Swiss franc gets, the higher the risks investors take when they engage in new carry trades?a sudden appreciation of the franc would lead to heavy losses for those who are short in the franc or have sold it in futures ? I am not sure whether all the market participants in this business are always aware of the risk.” – February 4, 2007