Which G20 Nations Are Behind Japan?

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Daily FX Market Roundup 02-14-13

Which G20 Nations Are Behind Japan?
EUR: More Concerns for Euro
USD: U.S. Data to Take Back Seat to G20
GBP: Drops to 7 Month Lows, All Eyes on Retail Sales
NZD: Strong Rise in Retail Sales
AUD: Inflation Expectations Edge Higher
CAD: Holds Above Parity

Which G20 Nations Are Behind Japan?

The world’s 20 most powerful economies are meeting in Moscow and USD/JPY extended its losses on the fear that the G20 will point fingers at Japan. While we didn’t believe that Japan will be singled out or that the G20 would harden its language on currencies, a draft of the communiqué said the G20 “pledges to refrain from competitive devaluation and is committed to avoiding FX rate misalignment.” If this language appears in the final statement, it may lead to more profit taking on USD/JPY because it represents tougher language on currencies, but it would not mean an all out collapse for the pair because Japan was not singled out and it would almost be expected that G20 countries would agree on paper to avoid competitively devaluing their currencies. If the G20 statement reads very much like the G7 statement and simply reaffirms that “fiscal and monetary policies have been and will remain oriented towards meeting our respective domestic objectives using domestic instruments, and that we will not target exchange rates,” USD/JPY could enjoy a relief rally.

At the end of the day we don’t expect any substantial changes to the exchange rate language in the G20 statement because too many countries are also guilty of manipulating their exchange rates through monetary policies or direct currency intervention. Here’s where we think each of the 20 nations stand on currency policy:

No issues with weak yen
US — Treasury supports Japan’s policies
Canada — Said G7 statement is a consensus and not aimed at singling out Japan
China — Guilty of persistent currency manipulation, so no finger pointing
Japan — Definitely won’t be criticizing itself
Germany — Wants to leave Japan alone
UK — Plans to ease consistent with their own devaluation of currencies
India — Wants a stronger currency to tame inflation
South Africa — Currency has been weak, won’t have any major issues with Yen
Turkey — Recently cut interest rates, calls for intervention
Argentina — Guilty of recent currency intervention
Indonesia — Has been guilty of recently intervening to support local currency

Supports tougher currency language
Russia — Wants specific language against FX intervention
South Korea — Competes with Japan, has BIG problems with Yen weakness
EU — EU as a whole leans towards more specific language on FX
France — Has concerns about currencies
Italy – Has concerns about currencies
Mexico — Has an “intervention free policy”

Brazil — Guilty of recent currency intervention, has strong currency
Saudi Arabia — Unknown
Australia — Plans to ease so probably won’t join calls for tougher language on Japan

EUR: More Concerns for Euro

The biggest mover today was the euro, which fell approximately 0.7% against the U.S. dollar, more than 1.3% against the Yen and approximately 0.4% against the British pound and Australian dollar. Weaker than expected fourth quarter GDP numbers led the decline as the technical recession in the Eurozone deepened. Not only did the Eurozone contract for the third quarter in a row but growth in the region has fallen 4 out of the last 5 quarters with the contraction in Q4 of last year being the deepest since 2009. Germany and France, the 2 largest economies in the Eurozone both experienced weaker than expected growth at the end of the year. While the outlook has brightened this year, the disappointing data still led to a round of profit taking in the EUR/USD. What are more concerning however were the comments from the ECB and the S&P. ECB Governing Council Member Constancio said the euro is volatile again and the central bank could consider negative interest rates but no decision has been made. These are the most dovish comments that we have heard from an ECB official so far but the market hasn’t latched onto them because Constancio could be making “technical comments,” meaning that the ECB could move to negative rates technically but haven’t decided to do so. Meanwhile it also didn’t help that Moritz Kraemer, S&P’s Managing Director of European Sovereign Ratings said Spain, Italy, Portugal and France could be downgraded this year. Spain is releasing its latest budget forecasts next week and Italy will be holding elections at the end of the month and unsatisfactory outcomes could lead to fresh rating actions which could compound the losses in the euro.

USD: U.S. Data to Take Back Seat to G20

The U.S. dollar traded higher against all of the major currencies with the exception of the Japanese Yen and New Zealand dollar. Despite some consistency in the price action of the greenback, country specific factors are still driving currency flows because the lack of big moves in U.S. stocks and bonds suggests that there is no risk on / risk off move in the FX market. Better than expected U.S. jobless claims failed to support the EUR/USD or USD/JPY. Jobless claims dropped 27k to 341k this week, which was the second lowest reading for claims since Jan 2008. Continuing claims also fell to 3.114 million from 3.24 million, the lowest level since July 2008. Yet the reason why investors ignored these stronger numbers is because the Labor department “estimated” claims for Connecticut and Illinois. The last time the government estimated claims was in back in January when claims fell to 330k and rebounded sharply the following week. As a result, the Federal Reserve will most likely take the improvement with a grain of salt. Meanwhile the Empire State manufacturing survey, Treasury International Capital flow report, Industrial production and the preliminary University of Michigan Consumer Confidence report for the month of February is due for release tomorrow. While these numbers could cause some volatility in the greenback, the focus will be on G20 statement.

GBP: Drops to 7 Month Lows, All Eyes on Retail Sales

The British pound continued to slide against the U.S. dollar, with the break below 1.55 taking the currency pair to its lowest level in 7 months. While sterling was not the worst performing currency today, it weakened against the USD, EUR and JPY. The lack of U.K. economic reports today suggests that today’s move is a continuation of the unwinding that has occurred over the past week. U.K. retail sales numbers are due for release tomorrow and the report could sink or save the pound. Consumer spending is the backbone of the economy as well as a key component of GDP. Based on the improvement in consumer confidence, decline in jobless claims and increase in the BRC retail sales monitor, economists are looking for retail sales to rebound in January after falling 2 out of the last 3 months and stagnating in the third during the fourth quarter. If retail sales fall short of expectations we could see steeper losses in the GBP/USD but if retail sales recover as expected, given the amount of selling that has occurred, we could see a sharp recovery in the pair. The key question at hand is whether Bank of England Governor King will increase asset purchases again before his term ends in July. We know that Carney leans towards easier monetary policy but unless absolutely necessary, King will most likely avoid taking further action before stepping down. Unfortunately the outlook for the U.K. economy is grim and therefore it will be a tough call for the central bank, making economic reports such as retail sales extremely important.

NZD: Sharp Rise in Retail Sales

The New Zealand dollar ended the North American trading session sharply higher against the U.S. dollar following better than expected Q4 retail sales numbers. Retail sales rose 2.1% in fourth quarter, which was consistent with the overall improvements seen in economy. New Zealand data has been very good with consumer confidence also rising near a 3 year high and manufacturing activity expanding at its fastest pace since May. These types of improvements are the reasons why NZD is not only performing well against the USD but also against the AUD. While inflation expectations in Australia increased slightly in February, the Reserve Bank could still lower interest rates in the first half of the year. As such, the downtrend in AUD/NZD should remain intact with support at 1.20. The Canadian dollar on the other hand continued to consolidate against the greenback above parity despite a small increase in Canadian oil prices. There is still a very wide gap between the price of Brent and Western Canada Select. No major economic reports were released from Canada today but manufacturing and existing home sales are due for release tomorrow.

Kathy Lien
Managing Director

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