Turning A Negative Into A Positive!

That’s what looks to be occurring in Japan, which for the first time in nearly 25 months is showing signs of inflation. Japan has been mired in economic stagnation for the last 20 years, other wise known as the Lost Decade which is ironic considering it is actually closer to 2 decades.

We are all aware of the earthquake, tsunami, and nuclear crisis that devastated Japan a few short months ago, and it is the disruptions of supply that has caused prices to rise. While the aftermath of the natural disaster is a negative thing, the economic growth that could come out of the re-building efforts could be a net positive. However, Fitch lowered Japan’s credit outlook.While silver linings may exist in Japan, this is clearly not the case in the US, as yesterday the GDP revision, personal consumption, and initial jobless claims figures all missed their mark. So we are seeing Dollar weakness in the marketplace, but don’t mistake this for risk appetite. Right now the fundamentals are starting to come back more into focus, as risk themes become more muddled.

One such beneficiary of risk themes has been the Suisse franc, which is now looking like the best safe-haven currency out there. It is hitting all-time highs vs. the Euro, the Dollar, and the Pound and the IMF just called for Switzerland to raise interest rates—which will make it more desirable if the Suisse do comply.

Later this morning, the US will report personal income and spending numbers, though it seems doubtful that these will impress the markets. Stocks are flat to slightly higher, with commodities stronger as next week is shortened due to the Memorial Day holiday here in the US. This means that banks are closed on Monday, which will reduce volume but not volatility.

In the forex market:

Aussie : The Aussie is mostly higher as yield-seeking is taking place on Dollar weakness. While there is still considerable risk in the market, the markets are becoming less enamored with the US dollar as a safe haven.

Kiwi : Another up day for the Kiwi on rumors that China has been buying in order to diversify it’s considerable currency reserves. It is at a 3-year high.

Loonie : The Loonie is losing its luster as it is being sold because of Canada’s close ties to the US. As economic conditions decline here in the US, Canada will decline as well as the US is by far the largest importer of Canadian goods and services.

Euro : The Euro is mostly higher as the anti-Dollar is benefiting from US economic malaise despite the problems in the Euro zone with the periphery countries debt problems. Euro zone economic confidence figures came in lower than expected.

Pound : The Pound is mixed as market concern over weak economic recovery in the UK is near the forefront. However, home prices rose for the month more slightly more than expected showing that there is still price stability and inflationary pressures in the economy.

Swissy : The Swissy is making new all-time highs vs. EUR, GBP, and USD after the IMF called for a rate hike in Switzerland. The Swissy has been receiving a major bid from its safe-haven status as a better performing economy than both the US and Japan.

Dollar : The Dollar is weaker across the board after the second day of weak economic data. Personal income figures came in as expected at .4%, but personal spending was slightly lower than expected at .4% vs. the expectation of .5%. Monday is a bank holiday in the US.

Yen : The Yen is mixed after Japanese CPI data ended 25 months of deflation after posting a .6% gain. Retail sales however fell 4.8%, though that was better than expected. The Fitch downgrade of Japan’s credit is a largely non-issue, and perhaps this will set the stage for some economic growth in Japan going forward.

The major theme of the last two days in US dollar weakness as negative economic data paints a picture of an economy in trouble. It is amazing that this makes the Dollar less desirable than the Euro, which is mired in its own problems with the debt problems of its periphery members.

Nevertheless, because Monday is a bank holiday here in the US, we could see some squaring of books this weekend though I don’t think the usual risk-off play of buying Dollars will happen.

Currencies like the Swissy and gold by proxy are taking away some of the Dollar’s attributes as the major safe-haven currency, which could be a problem if the US economy continues to sink.

With the problems that ail the US economy and no apparent solutions coming from US policy-makers, it could be a long summer for USD!

Enjoy the long weekend folks, I’ll be back on Tuesday!

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