Forex Institutional Research: Commerz Bank FX Daily
Key quotes from the Commerz Bank FX report:
G10 FX Research
USD, JPY, EUR: Some time ago I wrote that the chances of successful international policy coordination are low at present.1 For a while it seemed as if I had been wrong. Following the G20 meeting in Shanghai it seemed as if the global central banks would stop or at least diminish their efforts to weaken their own currencies. These efforts benefitted mainly the US dollar, at least as long as the Fed had refrained from explicit comments on the dollar strength. Following Shanghai the dollar eased notably. It seemed as if there had been a secret “Shanghai accord”, an agreement on a weaker dollar. Anyone who read my arguments clearly at the time would have noticed that I had not claimed that attempts of international policy coordination were unlikely. As an economist I would have been unable to do that. It is mainly a political question. I merely explained that coordination efforts have limited chances of success. Should Shanghai really have presented such an attempt, the G7 meeting of Finance Ministers in the Japanese city of Sendai illustrates my theory. Considering that G7 and G20 meetings are usually made out to be ultra-harmonious the barely disguised confrontation between the Japanese Finance Minister Taro Aso and his US counterpart Jack Lew was noteworthy. If we want to analyse the conflict we will have to cut through the rhetorical fog first. If Aso says the recent yen movement was “speculative” and “not orderly” that is of course nonsense. In any market that functions in a half way reasonable manner all FX moves are “speculative”. And not everything that does not suit the Japanese Finance Minister is “disorderly”. In reality Aso wants to obtain permission for yen interventions. At least in case the yen comes under renewed appreciation pressure. And Lew does not want to grant permission for that. For the US side, an old adage has long been reversed, and these days if he was honest Lew would probably say “a weak dollar is in the US interest”. And that means: in any policy coordination scheme some gain and some lose. But coordination can only be successful in a situation where all parties involved benefit – at least in the long run. That’s not the case in this zero sum game. And that’s why this open confrontation broke out in Sendai. If there had been something like a Shanghai accord it failed over last weekend. At least the Japanese Ministry of Finance is no longer taking part.
That does not mean that the BoJ will intervene immediately if the yen appreciates. It is in the nature of things that interventions against the Fed are risky. MoF and BoJ would probably only dare take a step of this nature if they were really extremely distressed. That may well be the case at some point in the future. The immediate risk is quite low though. (a) The pain threshold has not yet been reached. (b) Immediately after the G7 meeting it would constitute an unnecessary affront against the US side.
The US side has made it clear that the Treasury does not want USD appreciation. It is unclear to what extent this also reflects the Fed’s point of view. However, it is another little piece in the jigsaw that puts the extremely hawkish comments of the FOMC members and the similarly hawkish FOMC minutes into perspective. It means that US monetary policy cannot surprise the market too much as it would otherwise risk causing excessive USD appreciation.
And the euro? The European representatives were busy dealing with a coordination of fiscal policy. Some things never change… Otherwise at least they refrained from a public fallingout with their US colleagues. Which means that the ECB might further pursue the policy it has been pursuing since March: it will focus on domestic tools, and generally ignore the exchange rate channel. Medium term this strategy is unlikely to work. Until then the euro may well emerge as the winner.
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