BOE, Japan, Australia, South Korea and India Featured

The Bank of England kept rates on hold as widely expected. While there has been much discussion, if not consternation, over the possibility of QEII in the US, many observers have missed the creeping talk, in part encouraged by BOE Governor King, of another round of asset purchases by the BOE. Similar to the Fed, if it does transpire, most are not expecting it imminently. Talk in the UK is that a window of opportunity (necessity?) may open Q1next year as fiscal contraction kicks in.

Meanwhile, one of the reasons that the BOE explains some of the inflation pressures that have required it to formally explain itself to the Treasury is sterling’s past decline on a trade-weighted basis. That decline of sterling, however, has not been sufficient to help the trade account very much, underscoring our sense that officials and investors often exaggerate the role of exchange rates. The UK’s July trade deficit of GBP8.67 bln was nearly 20% larger than the market expected after a GBP7.5 bln deficit in June. The deterioration was roughly spilt between EU and non-EU. Like the US and Canada experienced in June, the UK recorded an import surge in July. Imports rose a sharp 3% on the month, while exports were off 0.9%.

Some may see the import surge as a sign of a stronger domestic economy. Color us skeptical. The import surge was concentrated in chemicals, pharmaceuticals and oil. Initial support for sterling is seen near $1.5350 and three is a reasonable chance that the trade-deficit inspired low just below $1.5380 may be the low for the session. Look for North American participants to be better buyers today, but resistance is seen in the $1.5460-80 area.

Japanese officials have indicated they will be looking into China’s purchases of Japanese debt instruments. It will be recalled that data earlier this week showed that China bought JPY583 bln Japanese debt in July on top of the JPY456 bln in June. July was the seventh consecutive month China bought Japanese fixed income instruments. The Ministry of Finance releases weekly portfolio flow data and today’s data for the week ending Sept 3, saw foreign investors buy about JPY1 trillion of Japanese securities. About half the purchases were bills, which given the low yield speaks to capital preservation motives and getting yen exposure. Of the other half the bulk was for Japanese stocks rather than bonds. However, the under-appreciated offset is Japanese purchases of foreign assets.

Typically when Japanese investors buy foreign assets they show a clear preference for bonds over stocks. In the most recent week Japanese investors bought JPY1.06 trillion of foreign bonds. This is roughly the average over the past 17 weeks. The more than JPY17 trillion of foreign bonds purchased in this period looks to be a record. To put it in perspective, consider that when Japan conducted its massive intervention, it sold around JPY20.5 trillion yen in Q4 03 and JPY14.8 trillion in Q1 04. Note too that Japan also receives around JPY1 trillion a month on its income (from past investments) account.

Australia reported another robust jobs report. It added almost 31k jobs in August, which was around expectations. The surprise was that that unemployment rate slipped 0.2% to 5.1%. The economy grew 53k full-time jobs and lost 22k part time jobs. In July it had lost about 9.5k full time jobs and gained 34.6k part time jobs. Despite the more neutral RBA statement this week, following the employment report, the market increased the odds of an October rate hike to about 25% (from about 10%), but another 25 bp hike appears nearly fully discounted by the end of the year. At multi-month high already, convincingly breaking the $0.9200 area, the next big objective is $0.9400. On the session thought the Australian dollar is over-stretched and better levels to buy will likely be seen rather than chasing the market here.

Most observers, including ourselves, had expected the central bank of Korea to hike its key 7-day repo rate today. It did not. The Korean won remained bid as expectations simply shifted to next month. Currently Korea’s inflation is roughly in the middle of the 2%-4% desired range. Inflation data will be the most important in shaping expectations. Over the past three-months, foreign investors have ploughed $17.2 bln into Korean bonds and $3 bln into Korean shares, according to government data. In this period, the won has appreciated 6.7% against the dollar, making it the second best regional currency behind the Japanese yen. In contrast, India faces increasing pressure to raie rates and may do so as early as next week (central bank meets on Sept 16). While food prices have risen (that was reported today), India reports industrial production figures tomorrow and CPI data next Tuesday. The dollar continues to carve out a large consolidative pattern against the INR. The boundaries of the large triangle pattern are seen roughly INR46.20 and INR47.05.