During the weekend, various G7, IMF and World Bank meetings failed to prop up any specific agreement on Forex matters and left countries contemplating on engaging in “currency wars” (a term coined by the media) as still free to manoeuvre.
The term “currency war” implies that a country tries devaluing its currency in an effort to sustain an export-led recovery. Japan, for example, managed to get away without any specific criticism of its foreign-exchange intervention policy – thus the likelihood of further intervention remains very real.
Despite USD’s short covering against the euro the USD/JPY traded lower, earlier this week, as the pair reached below the 82 level for the first time in 15 years. On Monday the USD/JPY fell to 81.40, below the level at which the BoJ had first intervened, and markets keep questioning when and if the BoJ will intervene again.
Japanese Finance Minister Yoshihiko Noda reportedly reiterated that Japan is willing to take decisive steps, including Forex intervention if needed. Asian countries have been reportedly stiffening measures to resist capital inflows that in turn boost their currencies and undermine their competitiveness.
Apart from Japan’s openness to more currency intervention, Thailand agreed to impose a 15 per cent withholding tax on capital gains and interest income from foreign investment in government debt in efforts to curb the baht’s strength.
Even China tried to limit the yuan’s strength by setting a weaker midpoint reference rate for the day’s trading. With the United States, Japan and Canada on holiday, Monday’s trading volumes were reportedly lower. The economic docket was also fairly poor last Monday and markets were mostly on hold or trading on sentiment.
EUR/USD traded lower early this week after investors seemed to be revaluating their short positions in the USD, ahead of FOMC minutes which were due to be published Tuesday evening. The US dollar was previously sold heavily due to the prospective QE after the Fed’s interest-rate decision and comments showed that it stood ready to provide more support to the economy and that it showed discomfort with regards to low inflation.
The prospects of further Quantitative Easing (QE) kept overshadowing the US dollar trading especially when last Friday’s US Payroll reports came in significantly weaker and was being seen as another reason for the Federal Reserve to give way to further QE.
But given the apparent discord amongst members of the FOMC, over the extent of more easing – investors were short covering some positions as they discounted some of the most aggressive QE expectations. Furthermore, traders and analysts were saying that the Euro’s recent bullishness was not thanks to its own merits but had been pushed higher by reserve diversification from Asia.
For the month to date, and till the time of writing, the euro is down 0.10 per cent, GBP is down 0.82 per cent, US dollar is down 1.74 per cent, Swiss Franc is up 0.79 per cent, and the yen is up 0.48 per cent,respectively against a basket of major currencies.
The Swissie and the yen keep attracting overall support on the global weakening data. Even gold and silver are enjoying “safe haven” support , Gold has reached all-time highs last week at around 1364 USD per ounce and so did silver reaching 23.65USD per ounce last Monday.
The GBP is weighed by the prospects of BoE introducing further QE and must also try to come to terms with a high headline inflation rate of 3.1 per cent when compared to the BoE’s two per cent target rate.
The British Pound fell to one week lows against the USD last Tuesday, after a Bank of England policymaker said that the central bank might use quantitative easing in the future. It seems like currencies are either classified as QE or non-QE, and consequently the market tries to offload the QE currencies.
The AUD/USD is trading levels we last saw back in July 2008, at the time of writing. The Aussie strength comes from, amongst other factors, surprisingly strong Jobs data released last week which rekindled talks for RBA rate hikes. Australia is not easing and does not have the fiscal problems other economies have.
Upcoming FX Key events:
Today: US PPI & Trade Balance.
Tomorrow: EZ CPI, US Advanced Retail Sales, US Michigan Confidence Index & US CPI.
FX Technical Key points:
EUR/USD is bullish, target 1.4200, key reversal point 1.3200.
USD/JPY is bearish, target 80.00, key reversal point 90.00.
GBP/USD is bullish, target 1.70, key reversal point 1.5200.
USD/CHF is bearish, open target, key reversal point 1.0200.
AUD/USD is bullish, target 100.00, key reversal point 89.00.
NZD/USD is bullish, target 0.78, key reversal point 0.7000.
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Mr Muscat is senior trader at RTFX Ltd.