End of FX Wars? - Rabobank
Jane Foley, Research Analyst at Rabobank, suggests that following the
G20 meetings earlier this year there were plenty of rumours that the US
had demanded that other central banks ease back from monetary policies
that led to USD strength.
“This talk appeared to be given credence by the indication from ECB President Draghi at the March policy meeting that further rate cuts were unlikely. Fed Chair Yellen did concede this year that the FOMC has not been prepared for the extent of the USD’s rally during the second half of 2014. Fed’s vice-chair Fischer at the end of last year outlined that USD strength had a significant impact on US inflation and exports. It is not difficult to join the dots and make the assumption that USD strength in the period between mid-2014 and March 2015 impacted 2015 US corporate earnings and has been a crucial factor in why the trajectory of anticipated Fed’s tightening has been drastically pared back relative to a year ago.
Even though it is clear that the strength of the USD in this period was a function of other central’s banks action in the currency war, we have previously argued that it is a stretch to imagine that the US authorities would demand that other central banks refrain from policy that resulted in USD strength. Rather we have maintained that there it is more likely that there may have been an attempt to highlight the downsides of currency wars more generally. This view appears to draw credence from the words of Treasury Jack Lew yesterday.
On the eve of the IMF’s spring meeting Lew recommended that IMF reform should allow it “to intensity scrutiny of critical issues like exchange rates”. It is the Treasury rather that the Fed which is responsible for USD policy hence these remarks appear to be drawn directly from the Treasury’s mandate. The US and other G7 nations have maintained for years that market forces should set exchange rates. However, the impact of market forces has become somewhat muddied not least by the adoption of negative interest rates by large central banks such as the ECB and BoJ.
BoE Governor Carney aired his view during this year’s G20 meeting that if the retail banking sector was safeguarded from negative interest rates then the primary impact of this policy would be on currency values. Non-G7 central banks such as the SNB, DKK and Riksbank have also implemented negative rates. These three central banks have been open about their intention to undermine the value of their respective currency although they have had varying degrees of success.
This morning’s release of Swedish March CPI inflation at 0.8% y/y may not sound like a jaw dropping figure but it is the fastest rate since 2012 and provides evidence that the Swedish economy is reflating at a fastest pace than its Eurozone neighbour. GDP growth in Sweden in Q4 registered a much better than expected 1.3% q/q and there is speculation that the government could announce a growth rate of around 4% for this year when it outlines its budget tomorrow. The better data complicates the policy outlook for the Riksbank since it is becoming clear that further easing may be difficult to defend. We continue to favour selling EUR/SEK into rallies.
While the small size of SEK flows suggest that the Riksbank are likely avoid much international criticism for monetary policy decisions, the same cannot be said about the BoJ. Despite recent speculation that Japan’s MoF could be poised to order the BoJ to intervene, we would expect that this is unlikely since it would be seen as a blatant act of currency war which would potentially draw criticism from the US.
While we see a fairly small risk of intervention, the chances of more BoJ policy at the April 28 policy meeting have been enhanced. Since the huge QQE programme has already depleted JGB supply, speculation is rising that the BoJ will increase involvement in other asset classes. This talk may help fend off further yen gains for now. USD/JPY should also find support on signs of oversold technical indicators. Key resistance at 111.00, support at 107.63/67.”