Cable Snaps As Bank Of England Welcomes The Currency Wars

Following yesterday's G-7 announcement which sent the USDJPY soaring, and its embarrassing "misinterpretation" clarification which undid the entire spike, by an anonymous source in the US who said the statement was in fact meant to state that the Yen was dropping too fast and was to discourage "currency wars", it was only a matter of time before another G-7 country stepped into the fray to provide a mis-misinterpretation of the original G-7 announcement. That someone was the BoE's outgoing head Mervyn King who at 5:30 am eastern delivered his inflation reporting which he said that "it’s very important to allow exchange rates to move," adding that "when countries take measures to use monetary stimulus to support growth in their economy, then there will be exchange rate consequences, and they should be allowed to flow through." Finally, King added that the BOE will look through CPI and relentless UK inflation to support the recovery, implicitly even if it means incurring more inflation.

In other words, the BOE is firmly on the side of Japan, because the BOE itself it itself planning on engaging in precisely the kind of currency warfare that Japan is in the spotlight for, or King merely validated what we said in November when we advised against the lunacy of holding GBPUSD now that a Goldmanite is set to be head of the central bank. Sure enough, the cable snapped and plunged over 100 pips in the aftermath of King's unofficial entry into the currency wars, and is now some 600 pips lower than when Carney was officially announced as the next head of the BOE.

Expect someone from the G-7/20 to say immediately that there is no currency wars even as England is now officially in them.

In other news from the otherwise quiet session, the Swiss government imposed capital buffers on banks to cool the blistering housing market, forcing banks to hold an extra 1% for mortgages as a means to offset capital risk. Since Switzerland and especially its real estate market are still a lone beacon of stability in a sea of European insolvency, we wish them the best of luck in attempting to cool their housing market.

Finally, and surprising nobody, socialist France which definitely has a spending problem, announced it would miss its 3% of GDP deficit target for the year.

Some more macro events from BBG:

  • Treasuries decline, curves bull- steepen as 10Y, 30Y yields rise before refunding auctions today and tomorrow. 
  • Yen erases overnight decline, falls to 93.53; EUR/USD gains to as much as 1.3493.
  • Bank of England Governor Mervyn King said Britain faces a further bout of inflation and a muted economic recovery, and pledged officials will look through the volatility in prices to keep nurturing growth where they can
  • Sweden’s central bank kept its benchmark interest rate unchanged at 1%, a decision predicted by 13 of 22 economists in a Bloomberg survey, with the rest expecting a cut
  • Euro-area industrial production increased more than forecast in December
  • The Swiss government ordered banks to hold additional capital as a buffer against risks posed by the country’s  biggest property boom in two decades
  • Obama laid out an activist second-term agenda, including raising the federal minimum wage to $9 an hour and threatening to use executive action on climate change and economic incentives if Congress doesn’t act
  • The world’s biggest buyers of corporate debt are seeking refuge in shorter-maturity bonds as concern deepens  that a three-decade rally will end in losses as interest rates rise
  • BofAML Corporate Master Index OAS steady at 148bps as $4.8b priced yesterday; Markit IG at 87bps. High Yield Master II OAS narrows to 504bps; $1b priced yesterday. CDX High Yield declines to 102.59
  • Nikkei falls 1%; China closed all week for New Year’s. European stocks decline, U.S. equity-index futures gain. Italian and Spanish yields fall, bund yields rise.  Energy higher; precious metals mixed

Here is what to expect in the macro realm today from SocGen

The G7 yesterday blamed investors for misinterpreting its first statement on exchange rates and it was forced into an embarrassing U-turn moments later after the JPY had initially continued to weaken when the first headlines broke. It subsequently stated that G7 countries are indeed concerned about excess moves in the Japanese currency and so the bounce back in JPY that instantly took place has carried on overnight during Asian hours with USD/JPY sliding below 93.00 and EUR/JPY defending 125.00. It is difficult to see the currency coming under pressure as we await official word from the G20 gathering tomorrow and Friday in Moscow. Former SNB chairman Hildebrand tried to pour cold water on the currency debate, stating that central banks are only pursuing policies in accordance with domestic mandates, referencing the existing output gap in the UK and the elevated US unemployment rate. This united developed market front is up against the emerging market front over the next 48 hours, but putting ourselves in PM Abe's position, there is no strategic domestic interest in trying to stop the yen from weakening.

And a full overnight recap from DB:

In terms of markets, if talking currencies were a currency in itself we'd all be rich at the moment. It seems that this is dominating macro discussions at the moment. Following the G7’s well publicised statement yesterday calling for “fiscal and monetary policies that…will not target exchange rates”, there were a number of subsequent conflicting statements. An unnamed official was quoted as saying that the G7’s statement “signalled concern about excess moves in the yen. The G7 is concerned about unilateral guidance on the yen”. The official added that “Japan will be in the spotlight at the G20 in Moscow this weekend" (Reuters). The comments caused the JPY to gain around 1.4% against the dollar. However another G7 official later commented that the statement was not about any individual country or currency, which helped the JPY pare initial moves upwards to finish 0.9% weaker on the day against the USD. The Fed’s Dennis Lockhart also weighed into the debate, assuring markets that we’re not “in a currency war in any sense”. He added that it’s more important that Japan breaks out of its deflation cycle, which he described is “in everybody’s interest”.

Indeed the rollercoaster ride for the yen has continued overnight with USDJPY trading another 0.55% lower as we type, at around 92.97 in Asian trading. Senior Japanese Finance Ministry official Takehiko Nakao made comments seemingly affirming his government’s commitment to market-determined exchange rates and said monetary policies must not be directed at devaluing currencies. Outside of the yen, the Nikkei is trading 1.2% lower, which is a fairly muted response given the Nikkei has averaged daily up/down moves of more than 2% in the last five sessions. The 10yr JGB yield is marginally lower at 0.743%, and is poised to close lower for the sixth straight day.

Turning to other overnight markets, Asian equities are trading broadly higher although liquidity remains low with markets in China, Hong Kong and Taiwan still closed for holidays. Interestingly, the KOSPI is leading the region’s gains (+1.48%) despite further North Korea-related headlines. Newswires are reporting that South Korea has positioned missiles in case of provocation from the North. The South Korean government has also stated that it will meet with US officials to explore nuclear deterrence strategies (Yonhap).

Recapping yesterday’s session, equities closed broadly higher with the S&P500 (+0.16%) continuing to forge new cyclical highs. European markets also finished strongly with the Stoxx600 adding 0.5% helped by better corporate results including a solid Q4 report from Barclays whose stock closed 8.6% higher. Barclays' results helped the European senior and sub financial credit indices outperform yesterday, closing 6bp and 11bp tighter respectively.

Draghi's speech to the Spanish parliament was also seen as supportive, which boosted sentiment in Spanish equities (IBEX +1.9%). Periphery bond yields also had a better session with Spanish and Italian 10yr yields closing around 10bp tighter.

In the US, Obama’s State of the Union speech laid out his agenda for his second term, with plenty of focus on “reigniting” the economy, reforming the tax code, reviving the middleclass and also gun control. The president called for raising the minimum wage to $9 from $7.25 and also urged Congress to approve a $50 billion “Fix It First” program of infrastructure improvements. On the budget debate, Obama said he remained committed to reducing the budget deficit, but warned that he would support only what he deems “balanced” efforts that include both spending cuts and tax increases, including the closing of tax loopholes for the highest income earners and corporations. The President also urged Congress to take measures to avert the upcoming spending sequesters (NY Times).

While on the subject of sequesters, Senate Minority Leader Mitch McConnell said late on Tuesday that it's now "pretty clear" that $85 billion in automatic spending cuts will take place, adding that he sees no sign that serious negotiations will occur to avert the sequester.

McConnell said he has no interest in reviving the kind of "eleventh hour" negotiations he participated in with Vice President Biden to avert the fiscal cliff in late December (Reuters).

Looking at today’s calendar, the US will print retail sales for January and the BoE publishes its quarterly inflation report. It will be an active day for auctions with Italy issuing 2017 floaters and 2015, 2026 and 2040 bonds. Germany will also auction EUR5bn in 2yr notes in the morning. The BoJ begins its two-day policy meeting today. So it will be interesting to see if we get anything further from the central bank most in focus at the moment.