Quiet Start To G-20 "Currency Warfare Conference" Week

In what has been a quiet start to week dominated by the G-20 meeting whose only purpose is to put Japan and its upstart currency destruction in its place, many are expecting a formal G-7 statement on currencies and what is and isn't allowed in currency warfare according to the "New Normal" non-Geneva convention. Because while there may not have been much overnight news, both the EURUSD and USDJPY just waited for Europe to open, to surge right out of the gates, and while the former has been somewhat subdued in the aftermath of the ECB's surprising entry into currency wars last week, it was the latter that was helped by statements from Haruhiko Kuroda (not to be confused with a Yankee's pitcher) who many believe will be the next head of the BOJ, who said that additional BOJ easing can be justified for 2013. He didn't add if that would happen only if he is elected. Expect much more volatility in various FX pairs as the topic of global thermonuclear currency war dominates the airwaves in the coming days.

What to expect today via SocGen:

A quiet start to the week is not expected to bring major changes to the positioning in currencies from late last week, though a number of pitfalls lie ahead before the G20 finmin meeting gets underway on Thursday. Japan is closed today and China is out for most of this week celebrating Lunar New Year, which should have an impact on liquidity. There is not much data to contend with today and this will put the onus on speeches by ECB members Nowotny and Weidmann.

President Draghi managed to stop the ascent of the EUR in its tracks last week when he acknowledged that the appreciation of the currency could lead to a revision next month of the inflation projection. In the meantime, however, crude oil prices are moving quickly towards $120pb. If this proves sustained (not so according to our SG commodities team, year-end target $112.3) and the EUR’s climb is (soon) exhausted, there is not much revision to inflation to be done. Brent crude is up 11% since the last staff forecasts in December. The euro effective exchange rate is up 5% or only half that. If this continues, Draghi’s iteration last week could easily end up being a faux pas. Having said that, (bond) markets would need to decide whether the danger of higher energy prices is a threat to the economic recovery or bring the risk of higher inflation.

The G20 meeting is billed as the most important event this week in light of the JPY depreciation and reactions from different export nations. In the past, G7/20 meetings have often been noteworthy for failing to take action. Will it be different this time? Japanese officials tried to calm things down a bit on Friday (though not PM Abe), suggesting that behind the scenes other countries are applying some pressure. Whether that’s enough to re-direct JPY flows remains to be seen.

And a full summary of recent events via Deutsche

A busy week lies ahead for macro watchers with the Eurogroup/ECOFIN meetings beginning today, followed by Obama's State of the Union address; and BoJ/G20 meetings rounding out the week's calendar.

We'll preview more of the week ahead later in today's EMR but first we'll recap some of the more interesting headlines over the weekend. Starting
with Europe first, in Italy the embargo on the publication of opinion polls ahead of upcoming elections began on Saturday. An average of polls calculated by Reuters just prior to the blackout showed the centre-left's Bersani on 34.7%, or 5.7 points ahead of Berlusconi. The anti establishment Five-Star Movement was running third on 16%, with Monti's centrists trailing on 13.6%. DB’s economists believe that a compromise between the PD-led centre-left coalition and Monti’s centre still appears the most likely working solution after the election. The winning coalition at national level will gain at least 54% of the seats in the lower house regardless of the victory margin. In the lower house, although the PD-led  centre-left, whose PM candidate is Bersani, continues to enjoy a non-negligible lead over ex-PM Berlusconi’s centre-right in the opinion polls, the gap between the two coalitions has been shrinking materially. Assuming that the above gap provides a margin large enough for the centre-left to win the majority premium in the lower house, the centre-right could still block the centre-left from obtaining an outright majority in the Parliament by winning in just two large regions such as Lombardy and Veneto in the race for the Senate. Our economists write that it is highly unlikely that ex-PM Berlusconi’s centre-right would gain an outright majority in the Senate. As we've previously stated, the fear was always that the pro-reform parties would not be well clear by the time the poll embargo began, so it will be interesting to see how Italian markets trade in the lead up to elections on the 24th-25th.

Across the Atlantic, the focus was on the much smaller-than-expected US trade deficit (December trade balance -$38.5bn vs. -$46.0bn expected). In fact, it was the narrowest trade deficit since January 2010 and was enough to raise Q4 GDP growth from -0.1% as originally reported to +0.7%. The data helped the S&P500 (+0.57%) forge a new post-financial crisis high on Friday of 1517.9, albeit on low volumes as market activity seemed to shut down early ahead of snow storms which hit the North East on the weekend. Indeed S&P500 volumes were the  lowest for a Friday since the last Friday of 2012 (Dec 28th).

Staying in the US, it was reported by Bloomberg over the weekend that US Senate democrats are close to finalizing a plan to delay spending sequesters until the end of the year, or a period of 10 months. Half of the cost of the $120bn plan would covered by revenue increases including setting a minimum 30% effective tax rate for the highest income earners and limiting the deductibility of costs in moving jobs outside of the US. The other half would be funded by more specific defense reductions and cuts to agricultural subsidies (Bloomberg).

Returning to Europe, in an interview in Germany's Handelsblatt newspaper, the ECB's Asmussen said that France's economic problems "lie within the country" and are not a function of the exchange rate. Asmussen said it was "extremely important" that France meet its public deficit target this year, saying if the forecasts indicate the target being missed, it is in the Paris government's own interest to take additional measures (Reuters). Some better news for Spain with Fitch affirming the country's BBB ratings with negative outlook after the market close on Friday.  Fitch's Spanish rating remains one notch above Moody's and S&P's.

Elsewhere in Europe, EU leaders agreed to a 7-year budget that cuts spending for the first time, bowing to UK PM David Cameron's insistence on a real-terms cut in EU spending. The deal sets the budget for 2014-2020 at EUR960bn down from an original proposal of EUR1.047 trillion and less than the EUR994bn spent in the current budget cycle. The budget requires the approval of the European Parliament (Bloomberg).

Ahead of today's Eurogroup meeting, the FT is reporting that Eurozone finance ministers are considering a plan for a "bail-in" of uninsured bank depositors and sovereign bond investors in Cyprus. The plan is intended to produce a more sustainable debt position for Cyprus by reducing debt to 77% of GDP compared with 140% under a full bailout plan. The article says that the plan is only one option being considered at this stage with some EU officials cautioning against the risk of contagion if the plan were to be adopted.

Moving to Asia and overnight markets have been very quiet with Lunar New Year holidays in China, Hong Kong, Singapore, Taiwan and South Korea. Japan is also closed today for National Founding holidays. Currency markets remain open although liquidity remains generally thin across the board. USDJPY is flat overnight at 92.7, with a small spike after Asian Development Bank President, and potential BoJ governor candidate, Haruhiko Kuroda was quoted as saying that additional monetary easing can be justified for 2013. In addition, Japan's economy minister said on Saturday that the government will step up efforts to lift the economy so that the Nikkei stock index will rise to 13,000 (or 17%) by the end of the first quarter.

The Australian dollar is down 0.22% against the greenback at 1.0296 while Australia's ASX200 has closed with a 0.24% loss.

Previewing the rest of the week ahead, the IMF's Christine Lagarde will join the Eurogroup meeting today to discuss Cyprus, Greece and direct bank recapitalisations. Obama delivers his annual State of the Union address to Congress on Tuesday. Also on Tuesday, Mario Draghi will appear before the Spanish parliament in Madrid and will probably touch on the ECB's OMT program. The European Commission is scheduled to unveil its proposals for a financial transaction tax on Thursday. On Friday, a two-day G20's central banker governors and finance ministers meeting commences in Moscow where we can expect more rhetoric on currency valuations (or devaluations!).

For the data watchers, the highlights will be Wednesday's retail sales report on Wednesday and the advanced Q4 GDP estimate for the Euro area, Germany, France and Italy on Thursday. Consensus is for output to be down 0.4%, 0.5%, 0.2% and 0.6% for the Euro area, Germany, France and Italy respectively. That aside, other notable data include French IP on Monday, Eurozone IP and the BoE's inflation report on Wednesday and UK retail sales on Friday. In the US, Friday's industrial production and Michigan consumer sentiment survey are worth watching. In terms of earnings, 74 of Stoxx600 companies (accounting for 15% of index market cap) will be reporting including Barclays, BNP Paribas, Societe Generale, Nestle and Glencore. The US earnings season begins to wind down with 53 S&P500 companies accounting for 9% of the market cap slated to  report. An Italian bond auction is scheduled for Wednesday where a 2017 floater, 2.75% 2015, 4.5% 2026 and 5% 2040 bonds will be auctioned.

In Asia, the BOJ begins its two day meeting on Wednesday. The market expects no change in policy and for the central bank to revise up its assessment of the economy. On the same day, Japan's preliminary 4Q GDP is released - consensus is for Japan to record its first expansion in three quarters (Cons:+0.1% QoQ). A quiet week other in Asia with China closed all week while Hong Kong and Singapore will reopen on Thursday and Wednesday respectively.


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