No currency war (psss yes there is)

Forex News and Events

The more policy officials attempt to discredit discussions over a currency war, the more we should pay attention. Central bank policy is the primary determinate of FX pricing. The head of the International Monetary Fund (IMF) Christine Lagarde recently rejected the concept of neo protectionism (since it seems currency war terminology is not PC) by stating "There's been lots of talk of currency wars, and we have not seen any such thing as a currency war. We've heard currency worries, not currency wars." Yet judging by the actions of policy makers globally, managing the exchange rates have now become the primary tool for economic recovery policy. Having failed to make the necessary structural changes that might have pulled them out of depressionary economic conditions, central bankers have turned to the quick fix of currency price manipulation. When faced with sub optimal growth and weak inflation dynamics, a weak currency can provide export growth, import inflation, and provide a broader economic pick up as busy companies create jobs and increase wages.

The current currency war has its roots in the 2009 G20 meeting where the theory of global rebalancing was launched. The concept suggests that countries with excess current account surplus through exports should shift towards consumption growth, while nations with deficits through consumption should shift economy towards export growth. The problem was that no one indicated how this transition should take place. Without the key structural changes, were results can be unpredictable, competitive devaluation provides a simple solution. According to the "premium parity puzzle" theory, a currency with higher interest rate expectations will appreciate versus that of a currency with lower interest rate expectations. Interestingly, still in the throw of the financial crisis central bankers were already using tools that weakened their currency, they only had to find other instruments to restrain interest rate expectations. Since then we have seen broad based quantitative easing and even negative interest rates. Countries have shown that they would be willing to cut rates prematurely (officially concerned over deflationary threats) then allow currency appreciation.

While global rebalancing has taken on a negative connotation, the concept remains strong. Lagarde has just changed the language. "There has to be fiscal consolidation and it has to be at the right pace and it has got to be country-specific. It often has to go hand in hand with monetary policy, and we've seen quite accommodative monetary policy in order to support and help fiscal consolidation" Lagarde stated.

This current phase of global currency wars was never about formal proclamations or grand gestures, but more fought as a guerrilla war. The US Treasury Departments Semi-Annual Report to Congress on International Economic and Exchange Rate Policies, warned Europe against relying too much on exports driven growth. This comment is a clear indication that currency wars are still raging. US policy makers are now worried that the strength of the USD will derail its economic recovery and are taking strategic (yet subtle) actions. Competitive devaluation was use extremely successfully to revitalize the US economy as rounds of QE kept USD artificially weak (remember EURUSD at 1.5144). Now that the tables are turned, with the ECB unleashing QE, debasing the EUR and stealing export growth, we expect this unobtrusive struggle to begin to heat up as the Fed heads towards its first interest rate hike in September and USD continues its bullish drive. Ironically, the next victim in the nonexistent currency war could be the US economy.

The Risk Today

Luc Luyet

EUR/USD continues to bounce. A resistance stands at 1.0888. Hourly supports are given by the rising trendline (around 1.0641) and 1.0521 (13/04/2015 low). In the longer term, the symmetrical triangle favours further weakness towards parity. As a result, any strength is likely to be temporary in nature. A strong resistance stands at 1.1114 (05/03/2015 low). Key supports can be found at 1.0504 (21/03/2003 low) and 1.0000 (psychological support).

GBP/USD continues to improve and is now close to the key resistance at 1.4994. Hourly supports can be found at 1.4813 and 1.4701. Another key resistance stands at 1.5137. In the longer-term, the break of the strong support at 1.4814 opens the way for further medium-term weakness towards the strong support at 1.4231 (20/05/2010 low). Another strong support stands at 1.3503 (23/01/2009 low). A key resistance can be found at 1.5552 (26/02/2015 high).

USD/JPY has weakened and is now challenging the support at 118.72. Hourly resistances can be found at 199.75 and 120.12 (intraday high). A key support stands at 118.18. A long-term bullish bias is favoured as long as the strong support at 115.57 (16/12/2014 low) holds. A gradual rise towards the major resistance at 124.14 (22/06/2007 high) is favoured. A key support can be found at 118.18 (16/02/2015 low), whereas a key resistance stands at 121.85 (see also the long-term declining channel).

USD/CHF has further declined and is now close to the key support area between 0.9491 and 0.9450 (see also the 38.2% retracement). Hourly resistances are given by the declining channel (around 0.9683) and 0.9772 (15/04/2015 high). • In the longer-term, the bullish momentum in USD/CHF has resumed after the decline linked to the removal of the EUR/CHF floor. A test of the strong resistance at 1.0240 is likely. A key support can be found at 0.9450 (26/02/2015 low, see also the 200-day moving average).

Resistance and Support: