Dollar: G20 Reticence to Advance Currency War Fears to Help and Hurt

Dollar: G20 Reticence to Advance Currency War Fears to Help and Hurt
Euro Bulls Will Take Over if Stimulus Withdrawal, Market Rate Climb Continues
Japanese Yen Given the Green Light to Continue Depreciation by G20
New Zealand Dollar the Focus of RBNZ Governor’s Upcoming Speech
British Pound: Is Sterling’s Safe Haven Status Reason for Persistent Selling?
Australian Dollar Unmoved by Distinctly Dovish RBA Minutes
Gold Unchanged in Quiet Session, Stimulus Efforts Will Continue to Weigh

New to FX? Watch thisVideo; For live market updates, visit DailyFX’s Real Time News Feed

Though far from a clear trend revival, the dollar opened this week with a bullish gap that was founded on the G20’s soft reproach of global policymakers’ attempts to devalue their own currencies. Looking to the greenback’s performance through Monday, the benchmark was virtually unchanged against its most volatile and liquid counterparts. EURUSD showed a tepid slip in the greenback’s favor while the high-yield AUDUSD nudged up a mere pip. The real dollar progress was made at the expense of weakness in the British pound, Canadian dollar and especially the Japanese yen –all counterparts that markets fear may move more aggressively towards stimulus and thereby offset the Fed’s impressive run.

We have seen relative stimulus efforts take the position of top fundamental catalyst these past weeks as general risk appetite trends have lost their influence over speculative positioning. That focus leveraged the market’s attentiveness to the G20 leaders’ discussion over the weekend of competitive devaluation of currencies as a means to artificially inflate international competiveness. After the two-day meeting, the collective of Finance Ministers and Central Bankers vowed not to target specific exchange rates in a bid to help economies. That works both for and against the world’s most liquid currency. Had the group decided to highlight manipulation or lay out what constitutes evidence of such a move, the Federal Reserve’s incredible 200-plus percent increase in its balance sheet over the past five years could have drawn a harsh appraisal. This is a tacit approval of the Fed to continue its $85-billion-per-month stimulus program. But it also allows others to ease.

Without question, the most active stimulus runner currently is the US central bank. However, its telegraphed stimulus efforts are already well priced into the market. Alternatively, the pace and size of Japan’s efforts are not well known – but they are the source of heavy speculative fodder. The same is true of the UK and Canada. The former has held off stimulus efforts that compete with the Fed, but economic pain and the arrival of Carney is expected to eventually tip the scales. As for Canada, we have transitions from an expected rate hike to a hold and possible easing in a short time frame. These marginal changes are the most significant than efforts already well underway. Also worth noting in the G20 statement, it was suggested that risks to growth were still clearly to the downside even if ‘tail risk’ has receded. The group went on to state that the US and Japan must resolve fiscal uncertainties. This has proven a conflicting signal. To put the dollar back on trend, we need risk trends.

Euro Bulls Will Take Over if Stimulus Withdrawal, Market Rate Climb Continues

The euro was stoic Monday as policymaker comments and data cut a relatively flattering profile for the currency. Against the backdrop of the Fed and BoJ looking to rework their language so as to continue forward with monetary easing that can weigh their currency lower, ECB President Draghi continued to walk down the road less traveled. The central banker said repeated the need to avoid volatile talk about exchange rates while saying his own currency was ‘in line with the long-term average’. If the ECB maintains its steady bearing on monetary policy heading forward, the early LTRO repayments will continue to pull down the balance sheet and raise short-term market rates. This would be a very risky position if the region were once again plagued by fears of crisis – but during calm and low yield spread conditions, it is seen as a higher rate of return in a relatively oversold currency. That said, we have seen the recovery in the three-month Euro-area Libor rate drop 9 percent since February 1 – following an impressive 29 percent climb from early December lows. The announcement of the first LTRO2 repayment Friday will carry considerable weight on this front. IN the meantime, Spain’s Prime Minister will update on the economy and market Tuesday.

Japanese Yen Given the Green Light to Continue Depreciation by G20
Like the G7, the G20 statement avoided explicitly blaming Japan for devaluing its currency. Though vows were made not to target exchange rates, that is what officials in the country will continue to do – they simply adjust their language. Stimulus will not be discussed in terms of reaching a 2 percent inflation target – something a few BoJ members (according to January minutes) think is unachievable. That target will work well for their purposes as it will essentially leave the door to a longer stimulus effort than otherwise possible. Now the focus shifts onto the possible BoJ Governor replacement candidates and their aptitude for ramping up stimulus. Meanwhile, keep an eye on risk trends.

New Zealand Dollar the Focus of RBNZ Governor’s Upcoming Speech

The ‘Kiwi dollar’ won an advance – albeit modest – against all of its most liquid crosses Monday. The PMI service sector report was a modest contributor on the heels of the manufacturing report; but it was a nice reminder for those looking for yield alternative to an Aussie dollar at risk of further cuts and capital outflow. Looking ahead to Wednesday morning RBNZ Governor Wheeler is expected to talk about the NZD. Beware.

British Pound: Is Sterling’s Safe Haven Status Reason for Persistent Selling?

A recent Guardian report called into question the pound’s loss of reserve status as a key component of the currency’s painful decline these past few months. Net speculative positioning in pound futures in COT data shows long interest has plunged to the lowest level since last June, but the sterling’s issues may be less dramatic. Economic troubles, a dovish (though inert) BoE and dropping Libor rate all hurt the investing outlook.

Australian Dollar Unmoved by Distinctly Dovish RBA Minutes

Australian monetary policy officials are not letting up on their dovish forecasts, yet reminders of that fact don’t seem to be adding any new selling pressure on the currency. The RBA minutes this morning stated that there was evidence that past rate cuts have worked and there was scope for more. Further, the Aussie dollar was said to still be high. That said, we’ve grown acclimated to dovish talk. The market wants action.

Gold Unchanged in Quiet Session, Stimulus Efforts Will Continue to Weigh

With the US markets offline for the President’s Day holiday, few capital markets were gaining serious traction due to the break in risk trend transmission. Gold was no exception. While the G20 statement offered tacit approval of stimulus growth moving forward, it doesn’t ensure more will be immediately pumped into the system. The higher global central bank balances sheets are, the better gold’s position is.

**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar

ECONOMIC DATA

GMT

Currency

Release

Survey

Comments