Having lived through the Plaza and Louvre Accords, we dislike the currency war saga. People say a lot of stupid things, mistaking self-interest for good economic reasoning. Yes, economic and policy divergences cause bad outcomes for some parties, unintended or not. Tough cookies.
We find it hilarious that the Russians hosting the G20 summit that starts tomorrow, are among the loudest voices calling for a stronger G20 stance against currency manipulation. The Russian private sector certainly understands free enterprise, probably better than anyone given 70 years of state-imposed pricing, and for the state to be calling for what amounts to a price control must be especially galling. Russia’s evolution to a free enterprise system-- initially introduced much too fast and having some awful consequences, like the emergence of the oligarchs--is taking another hit. According to Bloomberg, Russian FinMin Siluanov said “The G-20 countries have always held the position that currency policy should be based on market conditions. I think we should take a more specific stance on this.” Well, that’s ominous.
Bloomberg goes on, “One issue that will be addressed in Moscow is how foreign bond purchases can influence exchange rates, Siluanov said. ‘Sharp moves in exchange rates of any country should be predictable, and actually shouldn’t happen at all. We need to speak out more precisely about this issue and perhaps move from general phrases to more specific measures.’”
Russia is trying to shore up its “alliance” with the other BRICs and this is precisely the political stuff that supra-national organizations were invented to prevent and overcome. In the end, the West is going to do what it wants to do no matter what the rest of G20 says, risking G20 becoming irrelevant, assuming we gave it any relevance to begin with. For a finance minister to say exchange rates should not move is to misunderstand the very basics of free market supply and demand. Russia makes itself laughable with remarks like this.
Japanese leaders, meanwhile, have mustered up a new reservoir of machismo and defiant defense of self-interest. On the whole, the Japanese prefer consensus and quiet compromise to conflict and confrontation, so it’s uncharacteristic for them to challenge the rest of the world. As noted yesterday, the US and UK don’t have a leg to stand on, having taken precisely the same policy actions themselves, and today’s dire GDP report gives Japan just the excuse it needs to persist. Japan is often treated shabbily in G7, something ex-Fed chief Volcker mentions ruefully as long ago as the late 1990’s (in his book, Changing Fortunes). Evidently two decades of deflationary th recession finally woke up the dragon. Actually, it’s the 5 recession in 15 years, according to the FT, but we say it doesn’t matter—the Japanese economy has severe problems. It seems clear that G20 will end in tears over the weekend. ECB VP Constancio said today, according to Market News, "We need to avoid building up the rhetoric on currency war. The danger is that something worse could happen."
The System “revolves around market-determined exchange rates for the currencies of the world's advanced economies. ‘This implies that the exchange rate should not be the target of policy.’ While governments can intervene in a coordinated way when there is excessive volatility or prolonged overshooting, what is condemned is unilateral intervention,’ he said.” Bottom line, if you can’t stand the heat, get out of the kitchen. If you don’t like your currency appreciating too much by yield-seekers, fix it. Yes, this implies going back to the system with a few major countries having floating currencies and the rest of the world having fixed ones—1980’s redux. Aside from the BRICs renouncing reserves kept in advanced country bonds and currencies and retreating to gold, or something, fixing is the only solution we can see aside from better or different capital controls.
Bottom line, the BRICs are going to lose this one and depending on how angry they get, we could see some unpleasant words get thrown around. Unfortunately, words can move markets. As a general rule, we have to see the 10-year note leading the dollar upward, even if a lot of the move is a function of dumping other currencies whose economies are in worse shape. These moves tend to be short-lived, though—except when something is really new. We say Japanese machismo is new and needs to be respected. The yen’s drop against both the dollar and euro may be wildly overdone ,but we don’t see it ending.
|SPOT||CURRENT POSITION||SIGNAL STRENGHT||OPEN DATE||OPEN RATE||POSITION GAIN/LOSS|
|USD/JPY||93.53||LONG USD||STRONG||10 /17/12||78.71||15.85%|
|EURO/JPY||124.62||LONG EURO||STRONG||11 /21/12||105.38||18.26%|