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.
Key Quotes
“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.”
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