Global Macro: A Closeup on the Asian Pacific

TheStreet.com

NEW YORK (TheStreet) -- The Bank of Korea, South Korea's central bank, cut its key interest rate last week in order to keep pace with a weaker yen. Although the Bank of Japan is adamant that they do not intend on inciting a currency war, other countries look to be suffering from Japan's policy.

The yen has depreciated against the won by about 10% since the beginning of the year, which is hurting South Korea's export market. The Bank of Korea even cited a weaker yen as a potential threat to the country's economic viability.

Below is a chart of MSCI South Korea Index Fund over Total World Stock Index ETF . This chart shows South Korean equity weakness since the beginning of the year. In this time period the MAXIS Nikkei 225 Index ETF has taken off due to a strengthening trade balance. The two countries are fierce competitors in the export market, and this chart clearly shows a competitive advantage going in the way of Japan due to their favorable monetary policy.


Staying with the theme of the Japanese economy, the yen was able to break below the 100 mark versus the U.S. dollar. A catalyst for the broken barrier lies with the increase in foreign investment on the part of Japanese investors. When the Bank of Japan announced its aggressive policy, many people saw this as an opportunity for a flight of money out of Japan, towards foreign markets. As the yen falls, people sell Japanese bonds, and the interest rate increases as the Bank of Japan had hoped.

The issue with this is that the Japanese bonds, as low as their rates may be, act as a safe haven buy. When people start dumping Japanese bonds, it is a sign that risk assets are seen in a favorable light. The chart below is of DB Japanese Government Bond Futures ETN . The asset's break of its trend line confirms that selling of the yen has picked up steam. As investors sell the yen in order to buy foreign bonds, the yen should continue lower and Nikkei should push higher.


As the yen has weakened, the dollar has shown broader strength. Favorable economic data and central bank easing across the globe has given the dollar relative gains. An externality of this has been weaker commodity prices.

The pair below is of United States Oil Fund over an equal weight DB Commodity Index Tracking Fund . Oil has picked up steam with an improving global picture, but resistance lies overhead due to various factors. A strong dollar, for one, keeps oil capped from a move much higher. Similarly, an increase in global supply, as announced by OPEC, and the easing of inflation fears out of Australia both signal that commodities may have a tough road ahead in sustaining legitimate breakouts higher.


The last chart is of SPDR S&P Retail ETF over S&P Equal Weight ETF . This pair has shown considerable strength in 2013, but looks to be at a point of resistance. April retail sales release Monday, and should give this pair's direction more clarity.

The report will also tell a lot about the strength of the underlying economy. The economy is driven by the consumer, as consumer spending accounts for around 70% of U.S. GDP. The equity markets have seen a huge run up lately, and if retail sales show that consumer spending is strengthening, then this could be a catalyst for further US equity strength.



At the time of publication the author had no position in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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