FxPro Daily Forex Brief - Iran tensions could scupper fragile recovery hopes
Monday, 20 February 2012 | 09:03
Not to be ignored amidst some recent encouragement on the growth front in most major advanced economies is the
surging oil price. Brent crude has climbed further overnight, reaching USD 122 a barrel, a 9mth high. At a time when recovery is still rather fragile, this latest jump in the oil price could trample on these green shoots before they have had a chance to blossom. Back in mid-December, WTI was below USD 105, Growing Iranian tensions over recent weeks have contributed significantly to this oil price jump. Indeed, as our latest blog piece suggests (17.02.12 ‘Iran is rattling a lot of cages’), Iran is playing an incredibly high-stakes game with the West in order to gain nuclear capability. Chances are that the price of oil could still go higher, especially if Israel attacks Iran’s nuclear facilities and/or Iran carries out its threat to close the Straits of Hormuz through which 20% of the world’s passes. The US has already imposed crippling oil-related and financial sanctions, and the EU’s oil embargo bites fully in June. In response, Iran has withdrawn oil supplies to both the UK and France, and has threatened to withdraw oil exports to five other European countries as well. At this point in time neither China, Japan, India nor South Korea has yet pledged to support the US/EU oil sanctions. In fact they may increase purchases as Iran is forced to sell at a discount or even resort to bartering its oil for the commodities it is having increased difficulty buying due to US measures to interrupt trade financing. The US and EU have committed themselves to the path of sanctions despite the effect on oil supply and prices. Iran is steadfast in its refusal to discuss its nuclear programme, despite the damage to its economy and currency. Oil is the weapon of choice for both sides and the stakes could not be higher.
UK consumers respond to price discounting. Encouraged by very aggressive price discounting on the high street, UK consumers have been prepared to open their wallets selectively over the past couple of months. In January, retail sales volumes (ex. fuel) jumped 1.2%, after a 0.6% increase in the final month of last year. Demand for household goods surged nearly 5% in the latest month, although a similar cumulative decline was recorded over the previous four months. As such, it could reasonably be argued that massive price discounts unleashed some pent-up demand. For instance, household goods prices fell 0.9% in the latest month. Also, overall retail prices barely changed from October-January inclusive. In sharp contrast to the first half of last year when real incomes were being squeezed mercilessly, that pressure has diminished recently. For those still in work and confident of remaining employed, lower prices on the high street means their incomes stretch further than before. Some retailers reflected recently that sales volumes were actually fairly respectable last month. That said, let’s not get carried away. Unemployment is still rising, and for the majority of households the pressure on finances is still immense. Income growth for most in nominal terms is virtually non-existent; as such, only falling prices would deliver any respite to the general worsening of the cost of living. More and more retailers are going into administration, especially in those areas where there is a reliance on public money. Retailers generally remain extremely circumspect. At the very least however, it appears that the economy will not dip back into recession in the current quarter, following the decline in GDP in Q4.
Yen weakness will please Tokyo immensely. No doubt policy officials in Tokyo will be very pleased with the weakness of the currency so far in February. USD/JPY started out this month threatening to break down below the 76 level. There was much gnashing of teeth and threats of mass intervention from government ministers, a realistic prospect given the huge war-chest the BoJ has at its disposal. However, since then the yen has weakened consistently, and is now above 79. Two factors help to account for the turnaround. Firstly, risk appetite has continued to improve this month; Thursday night for instance, US equities reached a four-year high. As a result, some of those traders and investors who parked money in the Japanese currency as a safe port during Europe’s financial storm have gradually put their capital to work in growth assets and currencies. Witness the continuing surge in AUD/JPY which, since the start of 2012, is up almost 10%. Secondly, the BoJ’s surprise decision to lift asset purchases by JPY 10trln and - to announce an explicit inflation target of 1% - underlines their determination to support the economy. The latter had clearly been underestimated by the forex market. How the Japanese yen performs next month once the end of Japan’s financial year approaches is another matter, as this invariably corresponds with a good deal of repatriation by large Japanese companies. Even so, both the BoJ and the MoF will be encouraged by what they have seen in the last couple of weeks.
Equity bulls cheer despite Greek concerns. It is an old cliché but an apt one nevertheless – equities around the world continue to climb the wall of worry, gradually setting to one side concerns about Europe, Greece and global growth. Instead they are choosing to focus on the positive growth surprises that are emerging, especially in the United States. Consider the news out of the US just in the past few days: initial jobless claims fell to a new four-year low, housing starts are up 35% since February of last year and manufacturing is showing more signs of strength. In Europe, Germany seems to be holding up quite well despite a number of economies within the eurozone falling into recession and UK consumers returned to the shopping malls last month. China meanwhile is still being propelled forward by strong household spending. After appearing collectively to convince themselves late last year that financial Armageddon was imminent, both investors and traders have gradually been forced to cover their short positions in risk assets. This improvement in risk appetite has resulted in a very respectable run in global equity markets. The S&P 500 is up 17% over the past three months and reached a four-year high overnight; this index is now up 100% from the low reached in March 2009. Elsewhere, the DAX, Hang Seng and the Bovespa have jumped by one-third since early October. In the currency world, it has been a similar tale, with the high-beta currencies impressing and the safe-haven currencies lagging. Since the end of September, both the Aussie and the BRL have risen by around 15% against the traditional safe-haven currencies (the dollar, Swiss franc and the Japanese yen). Against this cheery background, and with the ECB set to undertake another helicopter drop later this month, right now it is difficult to pinpoint a trigger for a return of universal pessimism. It could be that markets are simply fed up with being concerned.
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