Good morning and welcome to today’s foreign exchange market commentary on Wednesday, the 13th of February.
The chatter about a looming global currency war seems vastly overdone. Only the Japanese have taken steps in recent times to step up liquidity and weaken the vastly overpriced yen. The newly elected Abe government is doing this to avoid the economy from sinking into deeper deflation. If no counter measures are launched, deflation will sink the Japanese economy in the years to come.
No large economy needs quantitative easing more than Japan. But Tokyo is yet to launch a full-blown QE in true sense. It has only given cheap loans to banks thus far. QE will probably be launched when the new chief of BoJ takes over.
Shinzo Abe has managed to depreciate the yen to about 93 a dollar from 77 a dollar, nearly 20 percent change. The yen’s reduction was long overdue and don’t be surprised if the Japanese unit hits 120 to the dollar by the end of the year.
This will however, will not translate into inflation. Nominal GDP has remained nearly flat over the past three years in Japan, i.e. total spending for the economy has been zero. In a sense, Japan has been witnessing a recession for the past 20 years and needs to recover fast.
Now, printing money is not the only solution to Japan’s growth woes. Supply-side tax cuts will also help promoting growth in the long run. Personal taxes are simply way too high in Japan. Also the Keynesian deficit-spending plans that the Japanese insist on have proven completely ineffective and have only pushed up debt levels.
There’s no doubt Japan needs new fiscal policies to promote growth. But just as inflation is a monetary occurrence, so is deflation. There’s no harm if Japan tries to correct this imbalance by weakening its currency and adding to reserves. Gold prices have remained steady around mid-$1600 level while the Chinese yuan has been fairly stable on the other side of the world.
So it’s less of a global currency war, and more of a pro-growth Japanese monetary policy.
CURRENCY RATES OVERVIEW
GBP/EURO – 1.1622
GBP/US$ – 1.5668
GBP/CHF – 1.4342
GBP/CAN$ – 1.5676
GBP/AUS$ – 1.5124
GBP/ZAR – 13.9456
GBP/JPY – 145.93
GBP/HKD – 12.1304
GBP/NZD – 1.8595
GBP/SEK – 9.9638
EUR: The euro continued its ascendancy against both the dollar and sterling yesterday after ECB President Mario Draghi applauded Spain’s economic progress following a closed-door meeting with the country’s lawmakers. Spanish banks are showing progress after last year’s capital infusion and the country is slowly getting back on the path to recovery, he said. The ongoing Ecofin meeting added little to market volatility and the G7 communiqué dominated headlines in the absence of any worthwhile data yesterday. Markets may, however, witness higher volatility if the European Industrial Production data falls short of the forecast.
USD: The greenback struggled yesterday, weakening against most of its rivals yesterday; but did reach a six-month high of 1.557 against sterling before giving up the gains in the afternoon. The cable has now fallen about five percent from the high reached in January and there is little to suggest that this trend is going to end soon. UK inflation data came out towards the higher end of BoE’s target yesterday with headline inflation hitting 2.7 percent. Markets will be keenly watching the BoE’s inflation report today sterling pairs are likely to respond to unusually high inflation/low growth forecasts. The pound clawed back some of its losses after the world’s seven leading industrialised nations pledged to maintain close coordination on exchange rates while Mario Draghi played down rumours of a looming currency war, stating they were way overdone. After a brief lull yesterday, we have a wave of US economic data coming out today. The US retail sales figure and crude oil inventories reports are due while Treasury Secretary Nominee Joseph Lew speaks to the Senate Finance Committee at 3pm, with the latter likely to cause volatility since it communicates the US president’s future economic policies.
Have a great day!
