Currency Wars nearing a full Blown Breakout
The world can expect a full Blown breakout of the so-called Currency Wars soon enough. Japanese currency – the Yen & the nations monetary policy have become the focus of the global Currency tensions ahead of a meeting of G20 finance ministers and central bankers later this week in Moscow. The statements out of the G7 meet (Finance ministers and central bank governors of the US, Japan, UK, France, Germany, Italy and Canada) were aimed at cooling the Currency Wars tensions; it instead triggered fresh concerns on the same. It seems that a misinterpretation of a statement intended to discourage Currency Wars, undid the entire upside spike seen a day before. A joint statement by the world’s richest nations roiled the markets after an attempt to soothe global Currency tensions backfired today at the G7 summit. Currency markets roiled amid conflicting messages on how much of an economic threat is posed by the weakening yen. The G7 nations took the unusual step of issuing a public statement to address rising concerns over a fresh round of global Currency Wars. In their statement on Tuesday, G7 finance chiefs reaffirmed that fiscal and monetary policies would not be directed at devaluing currencies. The yen fell on Wednesday, giving up earlier gains as investors shrugged off comments by a Group of Seven official the previous day, citing concerns about the yen’s excessive weakness. UK said the group wasn’t singling out an individual country or exchange rate. The Yen leapt & the US Dollar promptly gave back its earlier gains in volatile trade after a G7 official later said the G7 statement was in fact meant to signal worries about excessive moves in the yen, as told to Reuters in Washington. “The world wants a clear, coherent message from the leaders of the developed world,” said Mike Moran, senior currency strategist at Standard Chartered Plc in New York. “The G-20 is now going to be the key focus. Clearly the onus is on Japan.” “The world’s in turmoil with regard to currencies and it doesn’t really take a lot, in terms of a bad word here or there, to spark volatility,” Peter Dixon global financial economist at Commerzbank said. Analysts were also concerned about an apparent lack of consensus at the G7 level in tackling the risks of competitive currency devaluations as countries try to spur growth through expansionary domestic monetary policies. A concern illustrated when the Bank of England governor Mervyn King publicly criticized the anonymous G7 official. “When I put my name to that (G7) statement yesterday, I didn’t expect that other so-called officials will be out there giving un-attributable briefings,…trying to claim that the statement said what it didn’t say,” King said.
The Japanese clarification on Currency:
Expectations that Tokyo will take firm action to combat deflation have led to a sharp sell-off in the Japanese Yen, alarming the country’s trading partners. Abe’s administration has painted the stimulus as aimed at ending deflation. Japanese Finance Minister Taro Aso yesterday underscored that view, saying that the G-7 had acknowledged Japan isn’t driving devaluation and that its monetary policy is aimed at ending 15 years of falling prices. “Each nation understands that Japan’s policies to tackle deflation are not aimed at influencing foreign exchange rates,” Aso told reporters in Tokyo. “This was discussed by everyone.” This position was then challenged when an official from a G-7 nation issued a clarification saying investors had misread the statement and that the G-7 was concerned about excessive moves in the yen and Japan’s practice of giving guidance on its value. Japanese officials have stated that the country’s monetary policy is not intended to devalue the yen.
Under-currents & Plays in the Currency Wars:
Everyone would love a weaker currency, but it’s a zero sum game. If you weaken the yen someone else has to suffer a stronger currency. As G7 unity crumbled, the Bank of Canada’s governor said the world’s richest economies should not use monetary policy to target exchange rates. “It is extremely important … that we as a G7 go in united and forcefully to the G20 to enlarge that commitment as quickly as possible amongst the major emerging economies in the G20,” said Mark Carney, who will take over as Bank of England governor later this year. Leading emerging economies, such as Brazil, have complained about loose monetary policy in G7 countries, leading to warnings about an outbreak of low-level Currency Wars. The confusion sown by the G7 statement has heightened the risk that policymakers will use a G20 meeting in Moscow on Friday and Saturday to make further comments, either about the yen or the risk of wider currency devaluations. “To me the statement says — as long as price action is smooth (G7 officials) are not going to do anything. So I stand by my point that we are going to have more yen weakness in the medium-term,” said Vasileios Gkionakis, head of global FX strategy at UniCredit in London. He said Unicredit would maintain its long euro/yen position and target 130.00 yen in three to six months.
The BoE today said that inflation would stay higher for longer and its governor, Mervyn King cautioned that further bond-buying to boost the weak recovery might have limited impact. It’s very important to allow exchange rates to move, said King. 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. The bank forecast that inflation in two years’ time was likely to be around 2.3%, up sharply from the 1.8% forecast in November. It also extended the time frame for Inflation returning to target to early 2016, 18 months later than what it predicted in November. The bank’s forecasts also suggest inflation will peak at about 3.2% in the third quarter of 2013. “Attempting to bring inflation back to target sooner would risk derailing the recovery and undershooting the target in the medium term,” he said. Market confidence in Britain’s currency – the GB Pound was already thin & the governor’s admission that the inflation target is to be quietly ignored while the economy remains in intensive care has stretched it even further. Seems like, the BOE is firmly siding up with Japan. While Abe and aides have said the yen is only correcting its surge of last year and that their call for more aggressive monetary policy is centered on helping the economy, officials have at times indicated goals for the currency. Deputy Economy Minister Yasutoshi Nishimura said in a Jan. 24 interview that it wouldn’t be a problem if it reached 100 to the dollar. In private, the US has been pressuring Japan’s new government to refrain from mentioning the yen as it attempts to revive growth and end deflation. The US Treasury refused to comment. The U.S. indicated support for Japan two days ago, when Treasury Undersecretary Lael Brainard welcomed its effort to “reinvigorate growth.” Jack Lew, President Barack Obama’s nominee to be Treasury secretary, may be asked to flesh out the U.S. position when senators hold a hearing on his confirmation today. Swiss National Bank President Thomas Jordan, who oversees a cap of his own exchange rate against the euro, yesterday also defended Japan’s attempt to bolster growth, in denying that a “currency war” was under way.
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