Pessimism over the divergence trade is compounded by worries that the February G20 meeting may have seen a behind-the-scenes agreement for the ECB and BoJ to desist from policies that could push the Dollar stronger.
Comparing the February communique with that from September, there are two notable changes. First, the February communique contains language that countries should refrain from “disorderly moves” in their exchange rates, a reference to China and in line with our view that a large, one-off devaluation of the RMB is unlikely. Second, the September communique contained language that “monetary policy tightening is more likely in some advanced countries,” a reference to US monetary policy normalization. That language is missing from the February communique, which we think reflects US officials’ concern over market moves at the time. With the rebound in risk since then, we think that omission is dated, much as the past week’s dovish shift from the FOMC may turn out to be.
We see no conspiracy to stabilize exchange rates, just an unfortunate string of misfires from central banks (most notably the ECB), which will ultimately reinforce the divergence theme.
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