Japan's monetary base falls, Australia leaves rates unchanged

Japan's monetary base shrank 19.1 percent in the year to March 2007. Someday, this trend will end the yen carry trade. But not now. From Bloomberg:

The yen traded near the lowest in five weeks against the dollar as traders borrowed cheaply in Japan to invest in U.S. and European stocks.

Japan's currency has dropped against 69 of 71 currencies tracked by Bloomberg in the past week on speculation the nation's interest rates will stay the lowest among major economies, encouraging so-called carry trades. Gains in stocks give investors more confidence to put on trades with borrowed money.

"Its game back on for the carry trade," said Jonathan Cavenagh, a currency strategist at Westpac Banking Corp. in Sydney. "I expect to see further weakness in the yen."

It's all about central banks, I guess, and this news should limit the downside for the yen, at least for a while.

Australia's central bank kept its benchmark interest rate unchanged at a six-year high, giving policy makers time to study an inflation report later this month that economists say may prompt an increase.

The nation's currency dropped by the most in a month after Reserve Bank of Australia Governor Glenn Stevens left the overnight cash rate target at 6.25 percent for a fourth straight meeting. Thirteen of 25 economists surveyed by Bloomberg News predicted no change today.

However, the RBA could still raise rates soon, unlike the Federal Reserve, whose bias might nevertheless have been hardened somewhat by yesterday's housing data, reported by Bloomberg.

More Americans signed contracts to buy previously owned homes in February, easing concern the real-estate market will get even worse.

The National Association of Realtors' index of signed purchase agreements rose 0.7 percent after dropping 4.2 percent in January. Economists had forecast a decline. The index was down 8.5 percent from a year earlier.

The European Central Bank could also raise rates soon, especially after producer prices rose 0.3 percent in February, faster than January's 0.2 percent.

But some think the Bank of England will be the next to hike rates on Thursday, especially as wage growth and consumer confidence appear to be firm in March. From Reuters:

Eleven out of 60 analysts polled by Reuters last month predicted the BoE would hike a fourth time and take borrowing costs up to 5.5 percent this month. The rest saw no change but assigned a high probability to another rise. And if they don't this month, they will in May, seems to be the conventional wisdom.