• Will Anyone Win a Currency War?
  • JPY - Will the BoJ Under or Over Deliver?
  • EUR: Shifting Our Focus to Growth
  • GBP: Hit By Weaker in Retail Sales
  • CAD: Retail Sales to Set Expectations for BoC
  • AUD: Stabilizes Above 1.05
  • NZD: Extends Losses

 

Will Anyone Win a Currency War?

The currency war will be heating up tonight with the Bank of Japan expected to drive another bullet through the Japanese Yen. Tonight's Bank of Japan monetary policy meeting can play out in a variety of different ways but in one form or another, the final outcome will involve easier monetary policy. So far it seems that the Japanese are winning the currency war but when it comes to a competitive devaluation, there are no real winners. We have been in the midst of a currency war for some time now with some central banks devaluing their currencies through Quantitative Easing and others responding with intervention. At a time when growth is a premium, every country could use a weaker currency. A stronger currency can strip away the meager of amount of growth that most countries are expected to enjoy this year, which is why central banks have been fighting hard to prevent their own currencies from appreciating.

While the Federal Reserve, Bank of England, European Central Bank and the Bank of Japan have been particularly guilty of expanding their balance sheets and in turn devaluing their currencies, the USD, GBP and EUR have not necessarily lost value over the past year. The only reason why there is renewed talk of a currency war is because recently, government officials have become more vocal and are attempting to talk down their currencies, raising concerns about potential currency intervention. However when it comes to a currency war, not everyone can be a winner. Winning a currency war requires being willing and able to put your money where your mouth is and the Federal Reserve and the Bank of England certainly don't qualify. Neither of these central banks are apt to go beyond verbal intervention and even then, keep currency comments to a minimum. The European Central Bank is a bit more willing but according to President Draghi's comments last week, the EUR/USD is not overvalued and instead close to its long term average. On the other hand, the Bank of Japan or the Japanese government is both willing and able to drive their currency lower. Generally speaking, the central banks with the greatest amount of reserves are the most apt to intervene and there's plenty of them in Asia.

At the end of the day, if we have central bankers firing currency comments back and forth, the most likely outcome is a narrower trading range for the currency pair, which may be the best that everyone can hope for.

 

JPY - Will the BoJ Under or Over Deliver?

The time has finally come. For the past 2 months, USD/JPY has been on a tear in anticipation of more aggressive monetary easing from the Bank of Japan. While USD/JPY backed off the key 90 level today, the fact that it remains near its 2.5 year highs hours before the monetary policy announcement shows that investors expect a lot from the Bank of Japan. However when expectations are high, disappointment can come easy and in the case of the BoJ, even if they acquiesce and raise their inflation target to 2%, that may not be enough to drive USD/JPY higher considering that the currency pair already appreciated nearly 14% percent since the beginning of November. There's no question that Japan needs more stimulus. Since the last BoJ meeting in December, there has been more deterioration than improvements in Japan's economy with the biggest area of concern being the country's trade and current account deficits. In response, Prime Minister Abe kicked off his term with a major fiscal stimulus package but fiscal stimulus alone won't be enough. Abe knows that monetary loosening is an absolute necessity if Japan wants to recover from their pro-longed period of sub-par growth, which is why he has been so aggressive in calling for the BoJ to do more. Investors may be hoping for some aggressive action by the Bank of Japan but there's one wildcard to consider - BoJ Governor Shirakawa's term ends in April and he could surprise everyone by snubbing the LDP and saying no to a higher inflation target or an open ended QE program. He may choose to leave the problem to his successor who will probably be someone that the LDP has in their pocket. So even if the BoJ fails to deliver this week, the long-term trend in USD/JPY is higher. Prime Minister Abe has made it clear that he wants Shirakawa's successor to be someone who supports aggressive monetary easing which means that the BoJ will continue to buy bonds well after the Federal Reserve ends its Quantitative Easing program. Since we expect the Bank of Japan to be one of the most aggressive central banks this year, any dip in USD/JPY should be looked at as an opportunity to buy at lower levels, targeting a rally to at least 95. For the 3 things to look for at tonight's BoJ meeting read our BoJ Preview.

 

EUR: Shifting Our Focus to Growth

With U.S. markets closed for Martin Luther King Day, the euro ended the unchanged against the greenback. It has been an exceedingly quiet day for the currency pair, whose trading range was limited to approximately 30 pips. Eurozone Finance Ministers met in Brussels this morning and EU Finance Ministers will be meeting tomorrow. No new comments were made about the level of the currency. While nothing new is expected tomorrow, we will still be watching the headlines out of Europe especially with ECB President Draghi expected to speak in the afternoon. However our primary focus will be on economic data. The German ZEW survey is scheduled for release and a big improvement is expected in the sentiment index.   With European bond auctions going very well, sovereign debt risks receding further and the DAX hovering near 5 year highs, there are many reasons for investors to be optimistic but there are also concerns about growth that could affect confidence. Aside from the ZEW survey, Eurozone PMIs and the IFO report will also provide us with a better gauge of whether economic activity validates some of the concerns that we have heard about Eurozone growth.

 

GBP: Seven Consecutive Days of Weakness

For the seventh consecutive trading day, the British pound lost value against the U.S. dollar. What is surprising about the decline is that the FTSE edged higher and the only piece of U.K. data on the calendar, which was Rightmove House prices improved. According to the online property website, house prices increased 0.2% in the month of January with London home prices rising to its highest level in 5 years. This increase suggests that housing market may finally be stabilizing which is piece of good news that will be desperately needed this week. Public sector finances are scheduled for release tomorrow but the main reason why the GBP has been so weak is because of concerns about the BoE minutes and Friday's fourth quarter GDP report. Last week we learned that retail sales did not increase at all in Q4 and that bodes poorly for GDP. Weak consumer consumption may have also triggered renewed concerns in the central bank. Overall, the U.K. economy is headed for some trouble and the weakness in the GBP reflects traders positioning for weaker economic data. Former support at 1.60 is now resistance.

 

CAD: Retail Sales to Set Expectations for BoC

Canada was the only country to have any economic data on the calendar over the past 24 hours. Yet despite a larger than anticipated increase in wholesale sales, the CAD fell slightly against the greenback. Wholesale sales rose 0.7% in the month of November against expectations for a 0.5% rise. While this was a minor slowdown from the 0.8% growth enjoyed in October, the upside surprise should have boosted the CAD especially since wholesale sales is a leading indicator for tomorrow's retail sales. Economists expect consumer spending to be flat in the month of November but given the positive surprise in wholesale sales and the strong pace of job growth that month, we believe that the risk is to the upside as there's a good chance that consumers spent more that month. With the Bank of Canada meeting this week, stronger spending will give policymakers reason to remain hawkish. The New Zealand dollar also lost value against the greenback but the Australian dollar edged slightly higher. No news are expected from either country this evening.