Global Briefing: Calm Seas as Weekend Approaches

The dollar drops as the Japanese fiscal year ends.
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Activity in the global capital markets remains subdued as many participants turn their attention to the long holiday weekend. Most centers in Europe will not be open until Monday and full participation is unlikely before next Tuesday. Liquidity is expected to fall off shortly after the U.S. data releases are out of the way.

Japan's fiscal year ended with little fanfare.

Japanese stocks and bonds closed fractionally lower. The


closed a bit lower at 15,836, but posted an 11% rise for the month. The yield on Japan's 10-year benchmark bond rose a single basis point to 1.745%. Tomorrow the Japanese government will auction 1 trillion yen in four-year bonds. Many Japanese investors prefer intermediate-sector bonds on a total-return basis, so the auction is likely to be better received than next week's 20-year bond sale.

There had been some scattered market talk that a couple billion dollars needed to be bought today ahead of the fiscal year-end. This did not materialize. On the contrary, broad-based profit-taking on long dollar positions sent the greenback sharply lower. The dollar is testing a band of support found near 118.50-118.80 yen. A convincing break of that area could set the stage for a retest of last week's low near 117 yen over the next few sessions. The euro is approaching support near 127.25-127.50 yen. A break would encourage a run at the low set early in the first quarter near 124.60 yen.

Following yesterday's poor employment and spending data, Japan reported weak housing starts and construction orders today.

February housing starts fell 9.4% after January's 11.2% plunge. Japanese housing starts have fallen for 26 consecutive months. Construction orders fell 2.3% in February for the 14th consecutive decline. The evidence that the Japanese economy has stopped contracting, as some government officials have suggested, is fairly elusive. Monday Japan will release the much-watched


survey of business expectations. There does appear to have been some modest improvement in business sentiment in Japan, and the consensus calls for a reading of around minus 50, better than minus 56 in the previous survey.

European capital markets are quiet ahead.

Bonds are modestly firmer in the wake of yesterday's U.S. Treasury gains. Ten-year yields are off by 1-3 basis points. Equity markets are also eking out minor gains. A 6% rise in sales in the January-February period is helping boost



shares. Tobacco shares are generally weaker following the loss of a tobacco-related death case by

Philip Morris

(MO) - Get Report

. Merger-and-acquisition activity is helping underpin other sectors.

France reported an unexpected 7,900-worker increase in the February unemployment, the first rise since last August and fully offsetting the 4,000-worker decline in January. The unemployment rate ticked up to 11.5% from 11.4%, its first rise since July 1997. Elsewhere, Italy reported a larger-than-expected fall in February producer prices. The 0.2% decline pushes the year-over-year rate to minus 1.8% to stand at the lowest level since the index was developed in the early 1980s. Italian producer prices have fallen for the past 10 months.

On the other hand, Spanish producer prices rose 0.3% for the first increase in 16 months. Higher food prices offset the decline in energy prices in February. Lastly,


upgraded the rating of Spanish foreign currency borrowing to double-A-plus from double-A. Italy's and Portugal's credit rating for foreign currency borrowing remain at double-A.

The rally in oil prices coupled with the weakness of the euro likely means that eurozone inflation has probably seen its lowest levels for a while.

Nevertheless, pressure continues to mount on the

European Central Bank

to cut rates. Earlier today it was the

Bank of England's

Buiter, who took up former German Finance Minister


call for a rate cut. The ECB will meet twice in April, on April 8 and then again April 22. The real issue is whether it will ease at the first or the second meeting. Money-market rates, or the futures strip, are not sensitive enough to pick up how expectations are distributed.

Nevertheless, on balance, I lean toward a cut at the earlier meeting.

Data coming out around the latter meeting might make it more awkward to deliver a cut -- especially if price pressures do tick up, money-supply growth fails to slow and the euro continues to fall. The ECB has not been around long enough to establish a

modus operandi

, and the lack of transparency makes it difficult to predict how it will respond to the international pressure for a rate cut and the downward revisions to a number of eurozone countries' growth prospects.

Yet, because European officials expect the eurozone economy to improve later this year, the ECB may want to just get the move out of the way, which appears to be largely the rationale for last December's rate cut, just before the ECB became operational.

Here at the end of the first quarter, there are scant signs of the financial crisis that hit Latin America at the start of the quarter.

In dollar terms, the Brazilian stock market has risen by 12.7% so far this year, easily outperforming European bourses. The Mexican stock market is up more than twice this and is among the best performers on the quarter. The


has approved the next tranche of aid to Brazil and


has confirmed that it will maintain credit lines with Brazil. This helped lift the actively traded C bonds. At 15.33%, the yield on the C bonds is the lowest since early last December. Capital inflows, through fresh borrowings from abroad and foreign direct investment, are behind the real's recovery and have allowed reserves to begin being replenished. The government revealed that $1.4 billion of new direct investment was placed in Brazil this month.

The yield on Mexico's 28-day cetes (T-bills) fell 68 basis points at this week's auction. The yield now stands at 21.67%, representing a decline of about 925 basis points over the past two months. While interest rates have fallen, the peso has appreciated by nearly 6% against the dollar.

Brazil has experienced a similar development: As rates have fallen the currency has strengthened. Is any one at the IMF listening? The IMF often has argued that countries in crisis need to keep high rates to attract foreign capital and keep inflation in check. Yet developments over the past couple of months suggest the exact opposite strategy might have quicker and less painful results.

Marc Chandler is an independent global markets strategist who writes daily for At the time of publication, he held no positions in the stocks, currencies or instruments discussed in this column, though positions may change at any time. While he cannot provide investment advice or recommendations, he invites you to comment on his column at