G10 Officials Express Displeasure
28/09/09 21:32
Chris
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Despite the lack of high-profile policy meetings or summits this week, officials within the G10 are clearly expressing some displeasure at the state of exchange rates in the current environment, and the complaints are almost uniformly against currency strength. Switzerland and Japan are in the spotlight, where the threat of explicit action is very real, while other commodity bloc central banks may also continue to voice displeasure. The ECB has joined the chorus with both Trichet and Nowotny speaking in favour of a stronger dollar.
The SNB used very forceful language in a series of speeches last week and even defended their intervention measures as necessary for the economy and not a "beggar-thy-neighbour" policy. This week's Eurozone events and current levels in EURCHF have also raised the stakes. The ECB will hold its second 12-month refinancing operation this week and the SNB's last round of (suspected) major intervention occurred on the same day as the previous operation. It is possible that investors in need of CHF-liquidity have been borrowing from the ECB for a preferential rate and using the proceeds to sell EURCHF, and the SNB will need to enter the market to offset any currency swings. We are watching EURCHF and CHFJPY closely.
Saturday, Oct 3rd, 2009
I will be joined by the distinguished and entertaining Ashraf Laidi in a webinar this Saturday, Oct 3rd, where we will both present. Kindly visit the following link for details.
http://www.chrislori.com/ashraf-laidi.htm
You want to become a professional trader? Learn from professionals!!
Despite the lack of high-profile policy meetings or summits this week, officials within the G10 are clearly expressing some displeasure at the state of exchange rates in the current environment, and the complaints are almost uniformly against currency strength. Switzerland and Japan are in the spotlight, where the threat of explicit action is very real, while other commodity bloc central banks may also continue to voice displeasure. The ECB has joined the chorus with both Trichet and Nowotny speaking in favour of a stronger dollar.
The SNB used very forceful language in a series of speeches last week and even defended their intervention measures as necessary for the economy and not a "beggar-thy-neighbour" policy. This week's Eurozone events and current levels in EURCHF have also raised the stakes. The ECB will hold its second 12-month refinancing operation this week and the SNB's last round of (suspected) major intervention occurred on the same day as the previous operation. It is possible that investors in need of CHF-liquidity have been borrowing from the ECB for a preferential rate and using the proceeds to sell EURCHF, and the SNB will need to enter the market to offset any currency swings. We are watching EURCHF and CHFJPY closely.
In Japan the situation lacks clarity compared to Switzerland. The new Minister of Finance Hirohisa Fujii has already expressed some displeasure at JPY moves but also refused to commit to intervention, saying the market has been distorting some of his comments on FX. Nevertheless, Prime Minister Hatoyama noted that the JPY's rise is already hurting small businesses, hinting that the government will probably not allow JPY to appreciate indefinitely.
As expected, BoC Governor Carney reiterated that persistent currency strength could hurt the economy and delay a rebound in inflation. He said the BoC remains committed to stay at 0.25% through June 2010, contingent on inflation, and was worried about persistent, material deviation of the CAD from fundamentals. When asked about his message to currency investors regarding the CAD, he repeated that the BoC has considerable flexibility. The Bank of Canada's recent statements have clearly laid out the central bank's displeasure with the CAD's strength, but beyond verbal interventional we do not expect any major action, barring a dollar collapse.
It appears that the market has been "data watching" more closely of late with the major data releases becoming event risks once again. Risk sentiment remains a key driver of FX but risk seeking behaviour remains subject to pullbacks when major data releases, especially consumerrelated, disappoint.
A series of conflicting messages from Finance Minister Hirohisa Fujii has once again cast the spotlight on the new government's tolerance for sustained JPY gains. At present we believe the new MoF is adopting a wait-and-see attitude and recent appointments potentially suggest a more laissez-faire approach to foreign exchange markets. But the BoJ is concerned over a strong JPY and Japan appears to be no closer to pulling out of deflation. We continue to target gradual USDJPY strength but move our forecasts to market and look for the pair to trade at 85 in 1m and 90 in 3m.
The ECB's Trichet and Nowotny both said a strong dollar is important for the global economy and that there is no need to rush into exit strategies from current policies. The dollar comments were stronger than previous commentary and reflect concern regarding the impact of a stronger euro on the Eurozone economic recovery. We continue to prefer fading EUR gains on a relative value basis.
Ref: UBS, Bloomberg