Forex Weekly Report

The Japanese current account is being watched carefully for signs of improvement. However, the most recent reading from December 2013 shows that the deficit widened to a record. Furthermore, this was driven by an increase in imports as Japanese manufacturers increased their demand for foreign energy. Japan has no energy sources of its own, hence currency depreciation is a double edged sword. As the currency depreciates the cost of imported fuel becomes more expensive forcing the large manufacturing base to spend more and more on its energy inputs. If the degree to which the weakening currency has made exports cheaper does not offset the increase in fuel import costs, then the current account will in all likelihood continue to deteriorate. This is similar to the past experience of the United States. Prior to the discovery of shale gas, imported oil led to current account deterioration, despite a weaker USD. Focusing on the Australian component of this cross, we maintain our view expressed over recent weeks. Australia may see a mid to short-term reappraisal of its fortunes, however, we are not convinced that this will last.