Can policymakers clutch defeat from the jaws of a currency ‘truce’ victory? Of course they can!
The most obvious contradiction now at play, is how to square a slightly weaker USD versus EM not turning into too much USD weakness versus the EUR and JPY.
For Japan, as JPY relative strength reinforces Nikkei weakness, this currency ‘peace’ already feels like a new front in the old currency war. CNY/JPY is a much ignored cross returning to its old 20yr range, and China’s ‘gain’ could not come without Japan ‘pain’!
Collectively, if policy could kill FX vol for awhile, it would suit G20’s cause. A USD that is neither too hot nor too cold, near current levels versus all of the Rmb, EUR, JPY works well.
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That does not mean that markets will deliver what officials want, or, policymakers will do much more to squash vol.
Allowing the BoJ and ECB to make their FX preferences known would complicate future G20 currency politics, but the pragmatic approach would be for all major players to help the common cause and talk up stability.
A more stable USD may be a necessary, but is by no means a sufficient condition to support and stabilize risky assets. Profit depleted equities, and, excess supplied commodities, at a minimum need growth, and not just a more stable USD.
Currency politics has reached an interesting impasse, where the best move would be to extend the ‘truce’, inclusive of the yen. Hit the pause button, and talk up stability.