With the world so obviously gripped in currency war even the hotdog guy has moved away from saying how technically undervalued AAPL stock is to opining on who is leading the global race to debase, it was only a matter of time before the G-7 confirmed the only strategy left is FX devaluation by denying it. Sure enough, a preliminary statement from the G-7 came earlier, in which the leading "developed" nations said, well, absolutely nothing:
We, the G7 Ministers and Governors, reaffirm our longstanding commitment to market determined exchange rates and to consult closely in regard to actions in foreign exchange markets. We reaffirm that our fiscal and monetary policies have been and will remain oriented towards meeting our respective domestic objectives using domestic instruments, and that we will not target exchange rates. We are agreed that excessive volatility and disorderly movements in exchange rates can have adverse implications for economic and financial stability. We will continue to consult closely on exchange markets and cooperate as appropriate.
This follows a statement by the US Treasury's Lael Branaird yesterday in which she said that she is supportive of the effort in Japan to end deflation and “reinvigorate growth”. Lastly, the SNB's Jordan also confirmed that the Swiss National Bank will continue to do everything to crush its own currency, and will the 1.20 EURCHF floor, stating that Japan is merely doing the right thing to stimulate growth (i.e., doing what "we" are doing). In other words, let the FX wars continue and may the biggest balance sheet win, all the while everyone pretends nothing is happening.
Sure enough, the EUR took this statement as overriding French concerns on EURUSD strength, and promptly spiked by nearly 100 pips, in the process hurting all European exports but hitting Germany the least and everyone else more, as the true currency war toll of beggaring thine neighbors continues.
Expect nothing to change until i) the price of Brent/WTI surges high enough to where the Brent Vigilantes as defined previously stop the global devaluation party dead in its tracks, or ii) spring finally comes in China, and brings with it gobs of hot money, and soaring food and property prices, and a repeat of the spring of 2011 which, too, saw a rehearsal of the global currency war, which however was promptly ended when the PBOC cleared its throat.
Otherwise it has been a quiet session, with most still digesting the water cooler fallout from the North Korean nuclear test and the resignation of the Pope, and little in the form of macro data, which means FX crosses, and thus central bank balance sheets, will once again define risk levels and market conditions.
A summary of events to keep an eye on from SocGen:
The currency war will remain a key theme today after a salvo of comments from US and Japanese officials overnight kicked off a fresh rally in USD/JPY, though the UST/JGB 2y rate spread is tagging along (23bp). ECB President Draghi has successfully dampened the EUR's ascent since last Thursday, and ECB colleague Weidmann's comments yesterday failed to make gains stick overnight above 1.3400.
Today's meeting between EU's Juncker and French President Hollande in Paris will be all the more important ahead of the G20 meeting taking place at the end of the week. The currency war is clearly opened: the Japanese have successfully weakened the yen which is poised for being on the defensive for long even as net speculative JPY positions have stabilised over the past week. As for EUR/USD, the situation is less clear. The US authorities have no interest in a higher USD, while the Europeans have given conflicting messages regarding the euro of late, as they were clearly concerned by the speed of the EUR's strength in January. However, they may be reassured by this week's price action: is it just a question of volatility or a matter of levels? Mr Hollande may reiterate his own point of view today for the eurozone to have its own exchange rate policy.
The economic calendar will be very light today. However, the Spanish and Italian auctions will be worth watching amidst a fragile political climate and as Mr Draghi is visiting Madrid.
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An exhaustive summary of the past 24 hours via DB's Jim Reid
In an otherwise quiet start to the week for newsflow and economic data, perhaps the most interesting developments in the past 24 hours have been in Japan where the Nikkei is up 2.2% overnight. The latest positive catalyst has come from comments from the US Treasury undersecretary for international affairs, Lael Branaird. Although Branaird warned that “the G-20 needs to deliver on the commitment to move to market-determined exchange rates and refrain from competitive devaluation”, she said that she is supportive of the effort in Japan to end deflation and “reinvigorate growth”. Markets appear to have interpreted Branaird’s comments to mean there will be no US Treasury interference if there is further yen depreciation. Indeed, USDJPY added more than 1% on the headline and is currently trading at 94.00, or close to three-year highs. The Nikkei is also playing catch-up after being closed yesterday when Asia Development Bank president Haruhiko Kuroda, a candidate for the next BoJ governor, commented that he thinks further monetary stimulus is justified in 2013 and after the economy minister said that he would like to see the Nikkei at 13,000 by the end of March. If only it was always as easy as picking a number for the market to gravitate towards!
Outside of Japan, there have been no shortage of headlines in the Asian session despite much of the region remaining closed for Lunar New Year holidays. South Korean media reported that a magnitude 5.1 “artificial earthquake” was detected across the border in North Korea which the South Korean Defence Ministry later confirmed to be from a North Korean nuclear test (Yonhap News). Both the Japanese and South Korean governments have convened their own National Security Council meetings in response to the incident and the South Korean military has reportedly raised its state of alertness. The market response has been relatively muted however with the KOSPI (-0.15%) seeing some weakness and the Won paring initial losses after a South Korean official said that the US and China were given forewarning on today’s nuclear test (Yonhap).
Turning to Europe and if the region’s leadership uncertainties weren’t already confusing, we had the surprise news that Pope Benedict XVI had decided to step down yesterday, in the process becoming the first sitting Pope to resign in 600 years. That aside, much of the recent macro headlines have centred on the chatter around the euro’s valuation, which is sure to get further airtime at the G20 meetings later this week. The euro finished with a 0.31% gain against the dollar yesterday after late-day comments from Bundesbank chief Jens Weidmann who argued that the euro is not significantly overvalued despite its recent appreciation, echoing similar comments from the Luxembourg and Austrian finance ministers.
Weidmann added that an exchange-rate policy to specifically weaken the euro “would lead to higher inflation in the end". He also called for politicians to "hold on to the established division of labour", commenting that politically-induced depreciations "don't normally lead to a sustained increase in competitiveness" In the US, the S&P500 managed to climb back from the early lows to finish with a small loss for the day (-0.06%). Volumes were on the light side, probably hampered by commuting difficulties experienced by some New Yorkers following the weekend’s snowstorms in the US Northeast. The US wasn't alone as I spent the whole day yesterday at Geneva airport after numerous flight cancellations after heavy snow. For the record, yesterday’s S&P500 volumes were the lowest since the day after Xmas last year and the lowest volumes for a Monday since Xmas eve.
Helping sentiment towards the close were comments from Fed Vice Chairman Janet Yellen who said the Fed may hold rates near zero even if unemployment and inflation hit its near-term policy targets.
Yellen said those targets are "thresholds for possible action, not triggers that will necessarily prompt an immediate increase" in the FOMC's target rate. "When one of these thresholds is crossed, action is possible but not assured," she said, perhaps hinting that the Fed does not intend to back away from continued purchases in the near-term. In other market moves, 10yr UST yields added 1.4bp yesterday to close at 1.963% while gold finished down 1.15%.
In other news, Bloomberg reported that banks in the EU may need to comply with liquidity coverage rules sooner than in other parts of the globe. Ireland, which holds the rotating presidency of the EU, is pressing for an agreement to have the rule take full effect on Jan. 1st 2018, a year ahead of a deadline set just last month by global central bank chiefs, according to a document cited by Bloomberg which was drawn up by the Irish government on Feb. 8th. On the topic of Ireland, S&P revised the country’s BBB+ rating outlook to stable following the government’s decision to exchange promissory notes provided to IBRC for longer term Irish government bonds. S&P says that the move will reduce the government's funding requirements and funding costs, and increases the likelihood of a full return by Ireland to private financing at the end of 2013. Finally, the Eurogroup’s Dijsselbloem described the Greek program as “on track” with the next tranche of bailout payments likely to be made later this month.
Looking at today’s calendar, Eurozone finance ministers will be convening again in Brussels. The official agenda today includes preparatory discussions for the upcoming G20 meetings and an update on the implementation of a single supervisory mechanism for banks. The UK will publish the RICS house price survey and we'll see CPI for January. In the US, President Obama will deliver his annual State of the Union address in the evening. Ahead of that, the NFIB small business survey is due and we may get the MBA’s mortgage foreclosure and delinquency data for Q4.