FinancialExpat's Blog

The BRICs are buying dollars at the fastest pace since before the credit markets froze in September, protecting exports even as leaders of the biggest emerging markets consider alternatives to the US currency. Brazil, Russia, India and China increased foreign reserves by more than USD 60 billion in May to limit currency gains as the first global recession since World War II restricted exports. Brazil bought the most dollars in a year, India's reserves gained the most since January 2008 and Russia added the most foreign exchange since July. While Russian, Chinese and Brazilian leaders suggest substituting the dollar, the central bank purchases show just how dependant they remain on the world's reserve currency. Russia is proposing the BRICs consider creating a new unit of exchange when they meet in Yekaterinburg on 16 June. China and Brazil said last month they may look at ways of dropping the dollar for trade between the two countries. "Foreign central banks do not want to see their currencies relentlessly strengthen," said Daniel Tenengauzer, head of foreign-exchange and emerging market debt strategy at Bank of America-Merrill Lynch in New York. "Such a move would dampen an already-weak outlook outside the US and potentially risk even more capital-markets chaos if the dollar appeared to be heading toward a disorderly decline."

Crude oil is set to "spike" without new investments and a price surge is in the making, Royal Dutch Shell Plc Chief Executive Officer Jeroen van der Veer said. The global energy industry is facing "severe challenges" and the world needs unconventional energy supplies to meet rising demand, he said at the Asia Oil and Gas Conference in Kuala Lumpur yesterday. Oil's price decline has prompted exporters to delay or halt projects, a move that will cut supplies and push prices higher as the global economy recovers. "The economy will turn, demand will come back and the overcapacity of supply will disappear," van der Veer said. Crude oil for July delivery gained as much as USD 1.28 to USD 69.37 a barrel in electronic trading on the New York Stock Exchange. Prices have gained 55% this year and touched a seven-month high of USD 70.32 on 5 June.

President Dmitry Medvedev says the Russian economy will rebound faster than expected at the St Petersburg Economic Forum. Foreign observers including the World Bank, which has consistently forecast a deeper recession for Russia than its government, found reasons to be "guardedly optimistic." An 85% surge in Russian stocks this year can't be ignored as the rally may "anticipate developments" in the economy, said Klaus Rohland, the World Bank's chief representative in Russia.

China vehicle sales surged 34% in May on tax cuts and government subsidies, extending the country's lead over the US as the world's largest carmaker this year. Chinese drivers bought 1.12 million vehicles last month, with passenger-vehicle sales jumping 47% to 829,100.

Argentina's inflation rate is picking up, even as growth in South America's second-biggest economy comes to a standstill, putting pressure on policy makers to weaken the currency. The monthly inflation rate rose to 1.5% in May from 1.2% in April, said Jose Luis Blanco, an economist at Buenos Aires-based Tendencias Economicas research. "The central bank will put up less resistance against a depreciation of the peso," Alberto Ramos, an economist at Goldman Sachs Inc in New York, said. "The government needs a competitive exchange rate because it needs to boost fiscal income, to improve external accounts and because high inflation raises production costs."

The dollar fell against the euro and the yen as stocks rose and speculation the global recession may end this year damped demand for the dollar as a refuge. The euro climbed to USD 1.3933 today in London. The yen strengthened 0.5% to 98.03 per dollar and rose 0.2% to 136.61 against the euro. The pound appreciated 0.5% to USD 1.6130 and 0.2% to 86.41 pence per euro.

Spotlight on Japan

Japan, the land of the rising sun, and, for much of the past two decades, the land of the banking crisis, the ageing workforce and the falling stock market. So in light of the worst global economic downturn for generations, why should investors look east?

Undoubtedly, Japan is closely tied to the global economic cycle. Manufacturing dominates the economy and unsurprisingly the sharp fall-off in global demand has and a major impact. What grounds for optimism? The tough lessons learned during the banking crisis of the 1990s have not been forgotten. Consequently, the government have been able to reach for a number of "off-the-shelf" solutions. The government has announced four successive stimulus packages, focusing on tax cuts, public works, loan guarantees for small and medium-sized businesses and support for financial markets. These amount to about 5% of GDP, more than twice the proportion spent in the US. Meanwhile, the Bank of Japan has cut interest rates to effectively zero and taken steps to improve loan growth.

The other vital lesson Japan has learned is the avoidance of excessive leverage. As a result, debt is simply not a threat. Corporate balance sheets are strong, the housing market solid and the banking system liquid. All of this leaves Japan in a much better position than its G7 peers.

Importantly, the inventory cycle now appears to be bottoming out for many products. The sharp decline in demand was exacerbated by a dramatic drop in production aimed at reducing inventories at the end user, the sales channel and factory. The economist Richard Jerram has pointed out the inventory-adjustment process could lead to a record-breaking rise in industrial output between March and June as restocking gains pace.

And while the global inventory cycle is crucial for Japan, domestic demand appears to be improving too. Swift intervention by the authorities in the form of stimulus packages, appears to have taken effect, and Japanese consumer confidence is recovering sharply from last year. Also, it shouldn't be forgotten that many Japanese companies are global players with strong balance sheets which they have been able to use to restructure in order to maintain profitability even during this lean economic time.

Currency is another consideration. After a time of strength during the first stage of the global downturn, the yen has weakened against most major currencies this year. Because most Japanese companies are manufacturers who depend on external demand, a weaker yen is good for earnings.

A key question for the direction of the Japanese stock market is the attitude of foreign investors. Increased net buying by foreign investors normally leads to a rally, while net selling pushes the market southwards. Last year, foreign net selling was worth 3.7 trillion yen (GBP 24.3 billion), the first year of net selling since the bursting of the tech bubble in 2000. Foreign investors, currently well underweight in Japanese equities, may start buying leading to a sustained rally.

Finally, Japan's gearing into the global economic cycle means its stock market should rise when the world economy shows signs of recovery. The good news is that a bottoming in the OECD leading indicators may be around the corner.