Currency War ... Trade War ... Hot War
With Abe picking his new dovish playmate, and Draghi doing his best to jawbone the EUR down without actually saying anything, it is becoming very clear that no matter what level of bullshit histrionics is used by the politicians and bankers in public, the currency wars have begun to gather pace. Japan's more open aggressive policy intervention is the game-changer (and increasingly fascinating how they will talk around it at the upcoming G-20), as if a weaker JPY is an important pillar of the strategy to make this export-oriented economy more competitive again, it brings into the picture something that was missing from earlier interactions among central banks of the advanced economies – competitive depreciation. The last time the world saw a fully fledged currency war was in the early 1930s. Morgan Stanley's Joachim Fels looks at what it was like and what lessons can be drawn for the sequence of events - there are definite winners and losers and a clear first-mover advantage.
Beggar-Thy-Neighbor Currency Devaluations Proved Ruinous For The Global Economy In The 1930s ... Here We Go Again!Submitted by George Washington on 02/06/2013 14:20 -0400
The Global Currency War Is Escalating
G4+CHF can fight the currency wars longer and more aggressively than small G10 and EM countries can. However, as Citi's Steven Englander notes, it also takes a lot of depreciation to crowd in a meaningful amount of net exports. His bottom line, GBP, CHF and JPY have a lot further to depreciate. In principle, the USD can easily fall into this category as well, but right now the USD debate is focused on Fed policy – were it to become clear that balance sheet expansion will end well beyond end-2013, the USD would fall into the category of currency war ‘winners’ as well. Critically, though, the reality of currency wars is that policymakers do not use FX as cyclical stimulus because of its effectiveness; they use it because they have hit a wall with respect to the effectiveness of fiscal and monetary policies, and are unwilling to bite the structural policy bullet. The following seven points will be on every policymakers' mind - or should be.
Currency wars have captured the imagination of many. However, the modern history of the foreign exchange market demonstrates that is has always been an arena in which nation-states compete. Typically central banks want the currency's exchange rate to affirm not contradict monetary policy. The synchronized crisis and easier monetary policy makes it appear that nearly ever one wants a weak currency. Yet most officials are on low rungs of the intervention escalation ladder. Moreover, there is no sign of it spilling over to a trade war. Has any one else noticed that Japan's largest trading partner and regional rival China has been quiet, not joining the the chorus of criticism?
Even if you’re white, insured, educated, or in upper-income groups and live a healthy lifestyle, you’re still getting the short end of the stick
It is hard to find a policymaker who hasn’t actively tried to talk his currency down. The few who don’t talk, act as if they were intent on driving their currency lower. Citi's Steven Englander argues below that the ‘currency wars’ impact is collective monetary/liquidity easing. Collective easing is not neutral for currencies, the USD and JPY tend to fall when risk appetite grows while other currencies appreciate. Moreover, despite the rhetoric on intervention, we think that direct or indirect intervention is credible only in countries where domestic asset prices are undervalued and CPI/asset price inflation are not issues. In other countries, intervention can boost domestic asset prices and borrowing and create more medium-term economic and asset price risk than conventional currency overvaluation would. So the MoF/BoJ may be credible in their intervention, but countries whose economies and asset markets are performing more favorably have much more to lose from losing control of asset markets. So JPY and, eventually CHF, are likely to fall, but if the RBA or BoC were to engage in active intervention they may find themselves quickly facing unfavorable domestic asset market dynamics.
- Obama Picking Lew for Treasury Fuels Fight on Budget (BBG)
- Deutsche Bank Bank Made Huge Bet, and Profit, on Libor (WSJ)
- Spain Beats Maximum Target in First 2013 Debt Sale (BBG) - In other news, the social security fund is now running on negative?
- "Icahn is also believed to have taken a long position in Herbalife" (NYPost) - HLF +5% premarket
- Lew-for-Geithner Switch Closes Era of Tight Fed-Treasury Ties (BBG)
- Turkey Beating Norway as Biggest Regional Oil Driller (BBG)
- Greek State Firms are Facing Closure (WSJ)
- Draghi Spared as Confidence Swing Quells Rate-Cut Talk (BBG)
- China’s Yuan Loans Trail Estimates (BBG)
- SEC enforcement chief steps down (WSJ)
- CFPB releases new mortgage rules in bid to reduce risky lending (WaPo)
- Japan Bond Investors Expect Extra Sales From February (BBG)
There was a lively start to trading as the yen gapped lower in immediate response to new of the LDP's victory in the weekend elections in Japan. The greenback traded around JPY84.55, the highest level since April 2011. The euro traded to about JPY111.30, just below the year's high set in March near JPY111.45. The Nikkei gapped higher.
However, as the results were largely as expected. The LDP and its traditional ally, the New Komeito secured a 2/3 majority, which will prevent the upper house, in which the DPJ has a majority, from blocking the new government.
In addition, there is some speculation that the BOJ may stand pat at this week's meeting to enhance its negotiating position with LDP-led government. Before the weekend, the consensus was for the BOJ to expand its asset purchases plan by JPY5-10 trillion in the face of data pointing to the second consecutive quarterly economic contraction.
In a sharp turn around from the open, Italian and Spanish 10yr government bond yield spreads over German bunds trade approx. 10bps tighter on the day, this follows several market events this morning that have lifted sentiment. Firstly from a fixed income perspective, both Spain and Greece managed to sell more in their respective t-bill auctions than analysts were expecting and thus has eased concerns ahead of longer dated issuance from Spain this Thursday. In terms of other trigger points for today's risk on tone the December headline reading in the German ZEW survey was positive for the first time since May 2012 coming in at an impressive 6.9 M/M from previous -15.7 with the ZEW economists adding that Germany will not face a recession. Finally, reports overnight have suggested that Italian PM Monti could be wooed by Centrist groups which means that if he wanted too the technocrat PM could stand for elections next year albeit under a different ticket. As such yesterday's concerns over the Italian political scene have abated and the FTSE MIB and the IBEX 35 are out performing the core EU bourses. Looking ahead highlights from the US include trade balance, wholesale inventories and a USD 32bln 3yr note auction, however, volumes and price action may remain light ahead of the key FOMC decision on Wednesday.
Nationalizations and protectionism have run into a buzz saw.
The upcoming week is comparatively less loaded with policy events, though the ongoing fiscal cliff negotiations in the US remain one of the key developments to follow. Important is also the FOMC meeting on Wednesday, where Goldman and everyone else now expect the Fed to increase their monthly asset purchase target under the QE3 program to $85bn per month, up from $45bn per month; this will keep the pace of asset purchases constant after the Operation Twist expires at the end of December, as Zero Hedge predicted the day QE3 was announced. There are is a handful of other central bank meetings in emerging economies (Russia, Indonesia, South-Korea, Philippines, Chile) although consensus expects no change to the base-rate in most cases. On the data front industrial production numbers for October will be released around the world including in the Euro-area, US and China. We also get the US retail sales number and December flash PMIs for the Euro-area and China.
Another day, another melt up overnight wiping out all the post-Moody's weakness, this time coming courtesy of Europe, where following the French downgrade, the EURUSD filled its entire gap down and then some in the span of minutes following the European open, when it moved from 1.2775 to 1.2820 as if on command. And with the ES inextricably linked to the most active and levered pair in the world, it is is no surprise to see futures unchanged. It appears that the primary catalyst in the centrally planned market has become the opening of said "market" itself, as all other news flow is now largely irrelevant: after all the central planners have it all under control.
With Thanksgiving this Thursday, trading desks will be empty on Wednesday afternoon and remain so until next Monday. So even though it is a holiday shortened week, here are the main things to expect in the next 5 days: Bank of Japan meeting, the European Council meeting and the Eurogroup meeting. Key data releases include European and Chinese Flash PMIs.
- Wal-Mart misses topline expectations: Revenue $113.93bn, Exp $114.89bn, Sees full year EPS $4.88-$4.93, Exp. $4.94, Unveils new FCPA allegations; Stock down nearly 4%
- China chooses conservative new leaders (FT)
- Eurozone falls back into recession (FT)
- Moody’s to Assess U.K.’s Aaa Rating in 2013 Amid Slowing Economy (Bloomberg)
- Another bailout is imminent: FHA Nears Need for Taxpayer Funds (WSJ)
- Hamas chief vows to keep up "resistance" after Jaabari killed (Reuters)
- Obama calls for rich to pay more, keep middle-class cuts (Reuters)
- Obama Undecided on FBI's Petraeus Probe (WSJ)
- Battle lines drawn over “growth revenue” in fiscal cliff talks (Reuters)
- Rajoy’s Path to Bailout Clears as EU Endorses Austerity (Bloomberg)
- Zhou Seen Leaving PBOC as China Picks New Economic Chiefs (Bloomberg)
- Russia warns of tough response to U.S. human rights bill (Reuters)
- Japan Opposition Leader Ups Pressure on Central Bank (WSJ)
- Zhou Seen Leaving PBOC as China Picks New Economic Chiefs (Bloomberg)