Sleet and Misery

Outlook:

The idea of currency war has taken over everyone’s imagination, even those who should know better. The FT writes that Jan will be the best month in a very long time for currency fund managers because they were deeply engaged in the euro/yen trade. Stephen Jen, now at a fund manager but long a voice of sanity as chief currency economist at Morgan Stanley, told the FT that “Currency wars have been the most powerful driver of the currency markets since mid-November.”

Oh, please. Most of the currency war talk is pure bilge. We disapprove of analysts saying Draghi was engaging in verbal intervention when he said a strong euro may in the future change the analysis of the eurozone’s economic outlook. He may or may not have intended the statement to move the market, but never mind—it’s a true statement of economic cause-and-effect. It’s also not as shocking as Trichet saying the euro’s level was “brutal,” a word that carries more emotion. In the recent past, Australia, Canada and the UK have mentioned the level of the currency as a factor in policy consideration, and now of course we have Japanese remarks that seem targeted specifically at lowering the yen (but while staying within the limits of acceptable speech).

Clearly we need to redefine “acceptable speech.” It’s a terrible thing to have currencies move over 100 points on a single remark, especially when not accompanied by any actual policy change. But how do you curtail the freedom of speech of top officials? The press speculates that G7 is going to try, and we guess this is the story of the week.

Let’s start with the economics. The OECD says its Composite Leading Indicators show growth picking up in the US, UK, Japan and Brazil, but diverging to slower growth in Europe generally and France in particular. Overall, the CLI for the whole group rose to 100.4 in Dec from 100.3 in Nov, but this disguises weakness in some places, including China and India, where growth will be below trend. Even Canada and Russia are a bit iffy. Divergence in economic growth counts for a lot, including a willingness to be reasonable on the subject of the “currency war.”

As we wrote last week, there is no currency war, at least not one in which the key players perceive themselves to be engaged in such a thing. Fed policy is aimed at stability and growth with specific inflation and unemployment parameters, not at the level of the dollar. If the dollar falls because rate are zero (or rises on safe haven flows from other currencies), it’s an unintended consequence—a side-effect. If the Fed targeted the exchange rate, it would be derelict in its duty to the citizens of its own country.

Somebody should teach some basic economics to French Foreign Affairs Minister Fabius, who said yesterday that "There is a fierce [economic] competition and it is being waged through currencies but not only through currencies," according to the WSJ. The paper also reports that G7 finance ministry staff are in talks to decide whether to issue an official statement on exchange rates at the G20 meeting in Moscow. The deputy central bankers and finance ministers meet Feb 14-15 and the top central bankers and finance ministers meet Feb 15-16. Bloomberg notes ahead of time, on Feb 13, Jack Lew may get asked about currencies during his confirmation hearing for the job of US Treasury Secretary.

For the record, Bloomberg reminds us that the last time G7 commented on currencies was the G7 meeting in Marseille in Sept 2011. G7 “reaffirmed our shared interest in a strong and stable international financial system and our support for market-determined exchange rates…. Excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability. We will consult closely in regard to actions in exchange markets and will cooperate as appropriate.”

Japan is the obvious target if G7 decides to refine its statement. Japanese officials are mindful of the official G7 stance and has issued denials ahead of time that it’s taking any policy actions aimed specifically at the yen. EconMin Amari said (Jan 26) that the government’s focus is on reviving its economy and it is not actively pursuing a cheaper yen. According to Bloomberg, he said Japan is “absolutely not deviating from global standards. I don’t comment on a foreign-exchange rate because it should be determined by the market. What we do is to implement policies.”

Technically, this is correct. The big yen moves were inspired by key words and the expectation of new policies, with the only actual change coming in the form of another QE stimulus package. Strong-arming the BoJ into a joint statement that the inflation target will be 2% instead of 1% hardly counts as a policy action aimed only at the yen.

We will all be holding our breath to see if G7 comes up with something that will prevent G20 from making an inflammatory communiqué. The G20 meeting, please note, is in Moscow, where they know a thing or two about loose lips sinking ships. We think there will be a statement and it will caution officials to start keeping their lips zipped. This whole currency war thing is a distraction—entertaining, but not useful. And not even true. At a guess, the chart will be a better guide. We are long the euro and the latest threat to that position seems to be abating, exactly as it was supposed to near the chnnale bottom...

	SPOT	CURRENT POSITION	SIGNAL STRENGHT	OPEN DATE	OPEN RATE	POSITION GAIN/LOSS
USD/JPY	93.28	LONG USD	STRONG	10 /17/12	78.71	15.62%
GBP/USD	1.5692	SHORT GBP	STRONG	01/18/13	1.5942	1.57%
EURO/USD	1.3373	LONG EURO	STRONG	11/26/12	1.2970	3.11%
EURO/JPY	124.75	LONG EURO	STRONG	11 /21/12	105.38	18.38%
EURO/GBP	0.8521	LONG EURO	STRONG	11/26/12	0.8095	5.26%
GBP/JPY	146.40	LONG GBP	STRONG	11/21/12	131.02	11.74%
USD/CHF	0.9184	SHORT USD	WEAK	01/30/13	0.9163	-0.23%
USD/CAD	100.66	LONG USD	STRONG	01/24/13	0.9993	0.73%
AUD/USD	1.0265	SHORT AUD	STRONG	01/28/13	1.0392	1.22%
AUD/JPY	95.77	LONG AUD	STRONG	10/17/12	81.19	17.96%
USD/MXN	12.7736	LONG USD	NEW*WEAK	02/12/13	12.7736	0.00%