Honda not happy with strong Yen

TOKYO, Dec 19 (Reuters) - The head of Honda Motor Co warned the strong yen could cripple Japanese industry and spur massive layoffs, and said the automaker would be forced to bring more production overseas if the dollar persisted below 100 yen.

"If the government is saying, 'We don't care about the export industry', then that's fine -- we'll act accordingly," Chief Executive Takeo Fukui told a small group of reporters in an interview on Friday.

Honda, Japan's No.2 automaker, this week slashed its operating profit forecast by two-thirds to 180 billion yen ($2 billion) for the business year to March 31, dragged down by an estimated currency loss of twice that amount.

Expressing frustration with Japanese authorities' slowness to act, Fukui said Honda had set long-term business plans at what was until recently a cautious assumption of a 100-yen dollar, and that any level below that would necessitate a fundamental rethink of the way the company operates.

"If we go beyond (100 yen), we would simply have to transfer more production overseas, cut more temporary workers and even start laying off permanent jobs," he said.

"Beyond that we could switch to importing more cars into Japan, bring research and development facilities overseas, and in an extreme scenario move our headquarters offshore. It would cause nothing short of a hollowing out of Japanese industry."

Under pressure to reverse the dollar's fall and an economy already in recession, the Bank of Japan on Friday cut its key policy rate to 0.10 percent and took other steps aimed at easing corporate credit strains. The dollar budged little, however, briefly falling below pre-announcement levels under 89 yen.

NO MORE REVISIONS

Fukui, who mapped out this week about a dozen steps aimed at saving near-term cash and focusing on core projects, said Honda was determined to meet its new profit forecasts after issuing its third profit warning this week.

"We don't want to revise again no matter what, so we issued our forecasts with that in mind," he said.

Honda changed its dollar-yen assumption for the second half to 95 yen, far more favourable than current levels, but Fukui said the assumption for the final January-March quarter factored in a rate of about 90 yen and presented little risk for now.

He added that the counter-measures announced this week, including delaying the start of a new domestic factory by more than a year, would help lower capital spending "significantly" next year from the 650 billion yen planned this year.

"We'll have to make sure we can secure profits next business year even if the dollar averages 90 yen," Fukui said.

Yen trades

Still in my USD/JPY and NZD/JPY trades.

NZD/JPY looking better, and happy that will work over time, and I will add more to that position eventually.

USD/JPY remains well out of the money, but I made the decision when I opened it up again at 89.63 that I would wait until BoJ acts. That may not be until 85.00 yet, but when they do it will be explosive. I will write my thoughts on the USD/JPY outlook over the next few days.

NZD/USD update

Added a further long 1m NZD short USD at 0.5820.
This coupled with existing long at 0.5515 makes me long NZD2m at an average of 0.5668.

I expected the NZD/USD to rally over Christmas/January, see earlier post for reasons. The weakness in the USD itself is an added bonus. We saw 0.6080 overnight, so this current pull back is a great spot to add some more, which I just did.

I expect a test of 0.6500 in January.

Excellent Editorial from the New Zealand Herald Today

The Editorial from the Herald is spot on:

Eyebrows were raised this week when the Reserve Bank Governor castigated banks, oil companies and food manufacturers for not bringing down prices as much as they should. In a speech entitled "Everyone needs to play their part," Alan Bollard also told power companies not to keep pushing up prices and chastised local bodies for not keeping rate rises under the level of inflation. It was a sweeping assault aimed specifically at ensuring inflationary pressures continue to be dampened. More broadly, however, it was a welcome marker in a time of extraordinary economic stress.

Some of those criticised by Dr Bollard were quick to fire back. One or two had more reason than others. But the response from the Auckland City Council and the banks suggested that, at least in their cases, the governor's attack had been witheringly accurate. Most lamentably, councillor Doug Armstrong suggested Dr Bollard was wrong because Auckland City had managed to keep its rate rises within the "council rate of inflation". The only problem is that this year's council rate, the basis for rates and water bill increases, is 5.1 per cent. Over the past three years, the official rate of inflation has averaged just 3.2 per cent. As Dr Bollard suggests, councils have got into the habit of passing on big increases and not thinking too deeply about it. It is not, after all, their money.

The banks, also, had no valid comeback to the governor's surprise at not seeing more "pass-through" from the Reserve Bank's slashing of the official cash rate. Short-term mortgage rates have been cut but not by as much as the OCR reductions. The banks, variously, attributed this to the increased cost of borrowing overseas, a wish not to reduce deposit rates by a similar rate, and Government charges for the bank deposit guarantee scheme.

To heap blame on a scheme funded by the taxpayer for the good of the banking sector is ungracious, to say the least. So, too, is the lack of any acknowledgment that banks happily extracted huge profits before the United States sub-prime mortgage crisis bit. According to accounting firm KPMG, the big banks made combined profits of $4.8 billion before tax last year. Dr Bollard says they cannot expect to maintain high profit margins in the current environment. Asking them to come to the party seems particularly reasonable, given the underpinning they have received from the taxpayer.

Other industry sectors have not received such largesse. Some also point to an inherent conflict between Dr Bollard's wish and their responsibilities to their shareholders. But most companies will, in any case, be wary of lifting their prices for fear of losing out to competitors. Those who do and suffer for it will, ultimately, have served their shareholders badly. Dr Bollard has, of course, spent the past few years delivering stern and unpalatable messages. His entreaties to householders about their ongoing spending spree went largely unanswered. So, too, did his message to banks that some of their lending practices were rash. Now, his cutting of the official cash rate seeks to prise open people's chequebooks. There may be difficulties there, too, because many are worried about losing their jobs.

It will take even longer if the councils and companies targeted by Dr Bollard do not pull their weight. He will find it hard to keep cutting interest rates if there is no evidence that inflationary pressures are reducing significantly across the board. If such were the case, a vital stimulus would be lost. That would hinder not only economic recovery but the profitability or performance of each of the enterprises targeted by Dr Bollard. They have a vested interest in playing their part.

They should heed the governor.

USD/JPY Update

Could not resist the USD/JPY move under 90.00 yesterday so bought back USD3m at 89.63 closing out the short at 96.97 (see here for details) to re instate my original position of long USD3m at 103.10.... ouch! So banked a gain but still have an overall unrealised loss.

Will update net positions over the weekend.

Still believe the USD/JPY does not make sense under 110 given the state of the Japanese economy. Buying USD/JPY at close to 13 year lows seems sensible, but admit it hasn't worked so far.

As an aside, what really pisses me off are these comments from Reuters:

"Earlier, the dollar plunged to 88.10 yen , its lowest since mid-1995, after the U.S. Senate rejected a $14 billion auto rescue plan. That heightened recession fears, pushing investors to buy the yen to cover trades that were financed by borrowing the currency at low rates."

That is such a ridiculous comment. Who still has a carry trade in place to repay given the huge falls in the NZD/JPY and AUD/JPY and the JPY generally against the world? The corporates are well hedged and the Japanese housewife just acts on maturity and generally rolls over to keep yield. They certainly don't react to auto bail out failure news.

Sure there are new carry's being placed, but those are generally with intentions of adding on lower levels, not getting out, and waiting for the big retracement/new trend back again.

Who writes this crap?

Germany tells it straight

LONDON, Dec 10 (Reuters) - German Finance Minister Peer Steinbrueck has criticised countries for rushing through what he called crass and untested economic rescue packages at a "breathtaking and depressing" pace.

In an interview with Newsweek magazine, Steinbrueck urged governments to pause before pledging to spend billions of dollars on plans to try and help their economies emerge from the global credit crunch.

A recession was unavoidable and governments should stop trying to outdo each other with ever bigger stimulus measures, said Steinbrueck.

"The speed at which proposals are put together under pressure that don't even pass an economic test is breathtaking and depressing," he said in the interview, published on the magazine's website on Wednesday.

Steinbrueck singled out British Prime Minister Gordon Brown for particular criticism, accusing him of switching to economic policies that would saddle a generation with debt.

"The same people who would never touch deficit spending are now tossing around billions," he said.

"The switch from decades of supply-side politics all the way to a crass Keynesianism is breathtaking."

GERMAN DOUBTS

German Chancellor Angela Merkel's government has expressed doubts as to whether ever-increasing fiscal boosts are the cure-all solution for every country's economic ills.

"For a while the position in Brussels and a few other places has been, 'We're now very much for setting up large-scale spending programmes, but we're not really going to ask what the exact effects of those might be. And since the amounts are so high, well, let's get the Germans to pay because they can'," said Steinbrueck.

"Ms. Merkel and I are trying to calm them down a bit just now, and understandably that's getting us criticised."

Leaders of Britain, France and the European Commission met in London on Monday to present a united front on a 200 billion euro economic stimulus package for the EU, but Germany was left out of the talks.

European leaders are due to meet in Brussels on Thursday and Friday to discuss the proposal.

Asked what was wrong with stimulus proposals that some countries had already put forward, Steinbrueck was highly critical of Britain's plans to inject record sums of money into its economy.

"Our British friends are now cutting their value added (sales) tax," he said.

"We have no idea how much of that stores will pass on to customers ... All this will do is raise Britain's debt to a level that will take a whole generation to work off."

Keynesianism is based on the theories of British economist John Maynard Keynes, notably the use of government spending and low interest rates to stimulate demand during a recession.

Steinbrueck said people were naturally nervous about the financial crisis but that he wanted to give Germany's own 31 billion euro stimulus package time to succeed.

"As long as we haven't even given that a chance to work, I am not going to participate in this bidding war over who can do the most. I try to exude a little steadiness and continuity instead," he said.

About time someone put the other side to bailouts - KT

USD/JPY update

The USD/JPY is looking somewhat frisky again, but early days yet.

Placed a stop loss order to buy USD 3m sell JPY at 95.50 to unwind my "freeze" trades taken at average of 96.97 and book a small gain. (offset by bigger unrealised losses on original trades of course)

Probably won't get there anytime soon, but best to make sure that I'm back in the game on this trade if we have a serious rally building.