Bank of Japan Not Expected to Raise Interest Rates (page 1 of 2)

DailyFX Fundamentals 08-22-07


US Dollar: Rising Layoffs Poses Big Risks to US Labor Market

Today's recovery in the US stock market, carry trades and bond yields brought optimism back into the financial markets. News that BNP Paribas will be reopening its three frozen funds and reports that four of the nation's largest banks tapped the Fed's discount window as a vote of confidence has been taken very positively by traders and investors. Even though the rebound today was strong, which means that we could see a bit more extension tomorrow, traders need to be cautious because this is nothing more than a reflex rally. There was as much bad news as good. All of the weekly reports including the ABC consumer confidence and mortgage applications fell sharply. Confidence saw the steepest drop in 20 years. Lehman Brothers became the first Wall Street bank to close down its subprime lending unit and will be laying off 1200 workers. In fact, layoffs are being announced on a daily basis. The estimated toll of subprime related job losses is approximately 37,000. Even for the companies that are not cutting back on their workforce, they are not likely to be hiring either. The word on the street is that many companies have instituted hiring freezes. With the costs of borrowing increasing and demand for corporate issued commercial paper falling, keeping profit margins steady is the top priority for most companies. On a consumer level, a weaker labor market could put a big strain on household finances. On top of the rising cost of mortgages, credit card lenders are also increasing their terms of credit. This includes higher interest rates, lower lines of credit and more stringent review of finances. This would of course spell weaker consumer spending and eventually weaker us growth.

Bank of Japan Not Expected to Raise Interest Rates

Carry trades have rebounded strongly today thanks to the drop in market volatility. The VIX index has fallen another 2 points and is now close to 40 percent off its 4 year highs. The Bank of Japan will be announcing their monetary policy decision tonight. Given their repeated liquidity injections and the overall turmoil in the credit markets, the BoJ is not expected to raise interest rates. They will however be releasing their monthly report. Economic data has not been that hot over the past few weeks which suggest that the central bank could be a tad more pessimistic about growth. Last night Japan released their July merchandise trade balance which dropped from Y1223.4B down to Y671.2B. The drop in supermarket sales also worsened last month. The only saving grace is the continual demand from China. Exports to China increased 20.6 percent year over year. The Asian Giant is expected to shelter most of the region from any major subprime related fall-outs. China announced earlier this week that they will be allowing their citizens to start investing in the Hong Kong stock market. The markets see this as one of the country's first moves toward more open markets and in the future, they expect China to also allow investments in countries like Tokyo and Singapore. There is a lot of money at stake. JPMorgan estimates that at least $100bn of the country's $2,300bn in individual savings will leave China over the next year, with outflows increasing to $500bn over the next 3 years.

Stronger Eurozone Data Helps to Boost the Euro

Surprising strength in Eurozone industrial orders along with overall weakness in the US dollar has helped to trigger an upside breakout in the EUR/USD today.