Overview of the Capital Markets on Monday

There were a few developments in the capital markets on Monday, when the US and Canada were on holiday, that are noteworthy.  Asia initially reacted to the G20 statement by extending the yen's pre-weekend weakness. 

Recall before the weekend, a draft of the G20 statement was leaked and the dollar rose from about JPY92.25 to JPY93.85.  For its part, the euro had rallied from just below JPY123 to almost JPY125.50.  The follow through buying in early Asia carried the dollar to just above JPY94.20 and in early Europe, the euro was bid to almost JPY126.  

The G20 statements on the foreign exchange market did not break new ground.  Currencies ought not to be targets and adoption of market-based determination of foreign exchange prices should be accelerated.  Countries are free to pursue monetary and fiscal policies aimed at domestic policy objectives.  The was no criticism of Japanese monetary and fiscal policy mix.  Nor outside of Brazil's Mantega, was there serious criticism of US efforts to solidify growth prospects through long-term asset purchases.

China returned from its lunar new year celebration and reported that retail sales during the holiday were softest in four years.  The government had discouraged extravagant celebrations.  The PBOC set the yuan's reference rate 0.04% lower and the yuan declined by the most in two months.  Last week when Chinese market's were closed, the yen weakened about 0.9% against the dollar and sterling's fall was twice the magnitude, while the euro was slightly weaker.  

It is possible that Chinese officials, which have been notably quiet in the face of the decline yen's decline, may be seeking to safeguard their own exports.  One data point is not sufficient to arrive at such a strong conclusion.  Note that the dollar lost about 2.9% against the yuan from last July through early December.  It has since been confined to a range of about CNY6.2130 to CNY6.26.  

The Shanghai Composite fell about 0.45% in Monday's turnover, led by weakness in basic materials, telecom and financials.  Last week, when Chinese markets were closed, the MSCI Asia-Pacific Index did finish marginally lower.   

In Europe, sterling failed to maintain the somewhat better tone seen before the weekend. and fell to new seven month lows against the dollar.  The dismal retail sales report before the weekend and dovish official comments continues to weigh on sentiment.  Sterling's slide, having begun in earnest at the start of the year cannot be attributed to BOE's monetary policy, after all sterling made new multi-month highs since the conclusion of the latest round of gilt purchases and after Carney' was named King's replacement,  

ECB's Draghi spoke before the EU Parliament. While many other European institutions saw their capacity increase during the financial crisis, the EU Parliament, a democratic body, remains largely true to the literal meaning of parliament--a talking house--.  Draghi did not deem that body sufficiently august to do much more than repeat what had already said.  The euro was confined to last Friday's trading ranges.  

European bourses were mixed, but the Dow Jones Stoxx 600 recorded about a 0.2% decline, led by technology, basic materials, and telecom.  In the debt markets, peripheral bonds mostly fell while core bonds were firmer.  Of note, although Spanish 2-year notes have been outperforming their Italian counterparts in the run-up to latter's elections (14 bp over the past month), this was not the case on today.  

Spain did report a decline in non-performing bank loans to 10.4% in December from 11.4% in November.  However, rather than mark a turning point, it reflect the transfer of bad loans to Sareb, the government's "bad bank" that will warehouse and sell the assets.  The bad loans at the banks fell to 167.4 bln euros from 191 bln euros.  That is completely accounted for by transfer of 37 bln euros  of loans to Sareb by four banks that have been nationalized.  

Lastly, we note the continued weakness in the Canadian dollar.  It was the Loonie and not the yen that was the weakest major currency on Monday.  Its weakness also cannot be attributed to a shift in monetary policy as the BOC has remained decisively on hold even though it continues to warn that some accommodation will have to be removed though not imminently.  

Poor Canadian data, included most recently the pre-weekend news of a 3.1% decline in manufacturing sales, has taken a toll.  In our weekly currency positioning report, we have been tracking the liquidation of stale long speculative Canadian dollar future positions.  The gross longs have been halved this year.  After the yen and sterling, the Canadian dollar has been the third weakest of the major currencies this year.  

The greenback stopped just shy of the CAD1.0130 resistance area on Monday.  A break of it, which we anticipate, signals a move toward CAD1.02.