Amari and Holidays Spur FX Consolidation

Most of continental European markets are closed today for Whit Monday and Canadian markets are closed for Victoria Day. With important data and central bank officials speaking later this week, the market is content to keep most of the major currencies within the ranges seen before the weekend.

The yen is an exception. Comments by Economic Minister Amari that the correction to the yen's weakness is nearly complete, and additional yen weakness may be harmful, hit a thin pre-Asia market that saw the dollar spike lower to just below JPY102 before recovering. This was seen as a first attempt by the Abe government to slow the yen's descent. The motivation does not come from abroad as much as Japanese officials trying to stabilize the bond market.

Officials have tried changing the tactics of their QE purchases, making more frequent though smaller transactions, as the dealers wanted, but this appeared to have limited impact. At the end of last week,the BOJ injected a large amount of short-term liquidity and this seemed to help stabilize the tone, but the 10-year yield is up a few basis points today and almost 10 bp over the past week, making it the worst performing major bond market during that period.

The dollar has found support near JPY102.40 in the light European session. The JPY103 area may offer the immediate cap. The BOJ's two day meeting concludes tomorrow and some more guidance from Kuroda is expected. Earlier today the Abe government upgraded its assessment of the economy and the BOJ may do likewise tomorrow.

Despite the rise in the yen, Japanese equities extended their bull run, with the Nikkei gaining about 1.5%, led by oil and gas, utilities and telecoms. Financials and health care were the only two sectors showing weakness.
European developments are thin, but two developments seem noteworthy. First, Italy reported its first rise in industrial orders in five months. The 1.6% gain in March industrial orders was nearly three times more than the consensus expected. The premium Italy offers over Germany on 10-year money is near the lowest this year just above 250 bp.

Second, over the weekend, Bundesbank President Weidmann repeated his criticism of France, that it has a special responsibility to set an example and achieve its fiscal targets. This brings Weidmann into direct conflict with the Germany government, of which he was once a part. Finance Minister Schaeuble has given his approval to give France more time to achieve the 3% target. Nevertheless, Merkel and Schaeuble are likely to be pleased privately of the BBK's position.

However, it does raise some questions over what happens after the September election. Contacts in Frankfurt have been mulling the possibility that Weidmann moves over to the the finance ministry in the next government. While interesting, it never struck us as very likely. Yet given Weidmann's comments, his appointment would likely be both a cause and effect of a deteriorating relationship between the former two pillars of Europe.

While North American dealers may also be content to spend the session in a the consolidative mode, the dollar bullishness seems strongest here. They will likely take cues from the US Treasury market where the 10-year yield is again nearing the 2.0% level.