the Kobe disaster of January 1995.
Analysts looked at possible learning points, with one focus being the Japanese
yen. After the Kobe disaster, the dollar-yen exchange rate declined from
101 to 81 in little more than three months - in other words, the yen rapidly
strengthened by more than 20 per cent.
This made sense. Japan has massive investments abroad, and in times
of trouble, repatriation flows lead to greater demand for yen. Market
uncertainties could also reverse carry trades using yen as a funding currency.
Strong expectations for yen to strengthen after this disaster led its exchange
rate to decline from 83 to 76.4 within one week in mid-March.
That trend has quickly shifted, and dollar-yen is back up to 84.2. Concerted
intervention from the G-7 (a group of developed nations whose finance
ministers meet regularly to discuss policy) played a role. However, the main
factor behind the yen's weakening is that markets themselves have begun to
wonder whether the lessons of Kobe are applicable.
In particular, the Japanese story is not about reconstruction from earthquake
and tsunami, but is more about the radiation crisis (which did not occur in
1995) and whether it can be fully controlled. In the meantime, investors will
remain pessimistic on the Japanese recovery and on its currency.
Besides Japan, there have been three other big issues faced by markets.
In the Middle East, the situation is as confusing and volatile as ever. The
international intervention in Libya, and street protests in assorted countries,
still have unclear outcomes. But the impact on commodity markets has been
apparent - oil prices have remained above $100 per barrel for most of the
past month.
In the euro-zone, markets have had a lot of time to think about whether debt
problems in its smaller countries should impact the entire European Union.
The answer seems to be "no".
The bigger euro-zone economies have been doing well, and the European
Central Bank is poised to raise its policy rate (which has been at 1 per cent
since early 2009). This has provided broad support to the euro, as investors
appear relaxed about the ongoing problems at Portugal and Ireland.
And finally in the United States, the recovery finally appears to be gaining
some legs. The latest jobs report showed that unemployment in the first
quarter of 2011 has fallen to 8.9 per cent, from an average of 9.6 per cent in
the last quarter of 2010. This remains high - unemployment had been as low
as 4.4 per cent in 2006. But this was the largest quarterly decline since the
early 1980s, and is a positive step going forward.
Markets are now waiting on the reaction of the Federal Reserve. Comments
from senior Fed members are getting increased scrutiny for clues on US policy
after its bond-buying programme expires in June.
All of these events have led to much volatility. Markets have been reminded
once again that the past is history, and the future a mystery.
Parson Singha is chief markets strategist in the Global Markets Department of
HSBC Thailand.
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