- Euro members facing “dramatically” rising debt burdens need to push through budget cuts on a similar scale to those imposed by Latvia, said the Baltic nation’s Prime Minister, Valdis Dombrovskis, who oversaw the European Union’s toughest austerity measures last year.
- South African credit contracted for a sixth consecutive month in March as consumers curbed spending and banks tightened lending conditions. (Bloomberg)
- The Bank of Japan said on Friday it needed to do more to foster economic growth and renewed its commitment to ultra-loose monetary policy even as it signaled deflation may end sooner than earlier thought. (Reuters)
“For the euro zone, there is no debate for devaluation, so internal devaluation and fiscal adjustment seems to be the only available tool,” Dombrovskis said at an event in Munich today. “We seem to be proving that we were able to manage something many thought was impossible — an internal devaluation.” (Bloomberg)
Comment: GDP Impact from an “internal devaluation” was an 18.96% YOY decline for Latvia:
The straight jacket of the euro is what we call this. I wonder how many politicians within the fiscally broken states have the courage or the ability to force these kinds of internal adjustments. It may be a lot easier to just leave the euro and devalue accordingly. Can you say Drachma, Lira, Escudo, and Peseta?
Comment: When we look at the relative performance of South Africa we keep wondering why this currency continues to outperform the dollar and others by so much.
SA Rand-USD, AUD-USD, and CAD-USD Weekly:
But the answer is a simple one: all things commodities, plus hot money still likes the yield in South Africa. But relative to the outsized economic growth numbers being produced by the likes of Australia, Canada, and Brazil, in comparison South Africa continues to lag.
South Africa GDP YOY % Change:
It will be interesting to watch the South African rand and economy once that soccer money dries up. Stay tuned.
Comment: Many commentators look at the latest missives from Japan and the BOJ as more of the same. We see it differently. We believe Japan when they say they want USDJPY to rise to 120. There will be the liquidity backdrop to make it happen. We do think intervention when needed will be part of the process. And we continue to think that ongoing normalization of rates elsewhere leaves the yen right where the BOJ wants it—as the key carry trade currency again.
US Imports from Japan Absolute Value (black line) versus USDJPY (purple line):
Quotable – On Greek debt
“Happiness? A good cigar, a good meal, a good cigar and a good woman – or a bad woman; it depends on how much happiness you can handle.”