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G7 communique eases currency wars concern

Late on Tuesday morning, the group of the world’s major industrial nations sought to calm increasing concerns over a currency war and pledged to refrain from debasing their exchange rates to spur economic growth. In a joint statement released by finance ministers and Central Bank governors, the Group of Seven nations reaffirmed their “longstanding commitment to market determined exchange rates” and vowed to “consult closely in regard to actions on the foreign exchange markets”. The statement continues, that their respective “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”.

Japan may still come under serious pressure at a G20 meeting today

This latest statement was decisively tougher than the group’s last intervention regarding foreign exchange markets in 2011 as they try to avoid a so-called currency war, in which economies devaluate their respective currencies in order to boost exports and economic growth.

The intervention by G7 finance leaders comes after rhetoric over currency wars, sparked largely by new policy measures adopted by Japan’s new government, which is pushing for more stimulus to fight deflation and also recent calls on European policymakers to devaluate the strengthening euro. This prompted global financial leaders to issue the joint statement.

Japanese Finance Minister Taro Aso applauded the statement, saying that it acknowledges that the recent policy adopted by Japan was aimed at reversing declining prices and not at weakening the yen. The Japanese yen reversed all its earlier gains versus the US dollar and the euro on Tuesday.

USD/JPY started the week lower at 92.39 but shot up to 94.46, its highest level since May 2010, after comments by US Treasury Under-secretary Brainard who said the US supports Japan’s efforts to fight deflation, and implied tolerance towards a weaker yen. The pair slid early on Tuesday on some profit taking, but rose back to 94.41 soon after the G7’s communique. EUR/JPY also surged after the statement and rose to a session high by 126.95, hovering close to its three-year high of 127.71 hit on February 6.

Despite Tuesday’s statement, Japan may still come under serious pressure at a G20 finance ministers and central bankers meeting today and tomorrow. However, the Japanese yen is expected to continue its downtrend against its major peers as little pressure was exerted on Japan by other global financial leaders.

Last week, the European common currency recorded its deepest decline since the beginning of its bullish run in July 2012. The single currency dropped more than two per cent against the dollar, while posting its steepest weekly decline since 2011 versus the pound, and also recorded its first weekly negative performance since December against the yen. The euro’s decline started as talk of concern over its recent strength took shape. Its correction accelerated after European Central Bank President Mario Draghi said on Thursday, that growth may slow as the euro strengthened.

EUR/USD closed the week by 1.3366, plunging from a 15-month high hit on February 1, by 1.3711. The pair bounced back to 1.3467 on Tuesday as global leaders reiterated their commitment to market-determined exchange rates.

Technically, the pair has so far bounced off a key support level by 1.3354 and as long as it does not record a daily close below this level, a resumption of the broader bull trend is favoured to test the next major target by 1.3836.

After posting a modest recovery against the euro and the buck, sterling was again under heavy pressure by the time of writing. GBP/USD fell to 1.5574 on Tuesday after it rallied more than 200 pips to 1.5844 from 1.5631 last week. EUR/GBP rose to 0.8631 on Tuesday after it recorded its steepest weekly decline since 2011, closing at 0.8461 from 0.8698. From a technical point of view, the move was seen as a corrective one and the pair is expected to resume its bullish trend in the near to medium term.

The Swiss franc trimmed some of its recent gains against the euro at the start of the week. EUR/CHF recovered to a session high by 1.2356 on Tuesday, after Swiss National Bank chairman Thomas Jordan said that the bank could use “additional measures” to manage monetary policy besides the floor of 1.2000 on EUR/CHF. Last week EUR/CHF fell to 1.2256, some way off its 20-month peak of 1.2569 hit on January 18, as forex investors again sought it for its safe haven status.

Upcoming FX key events
Today: Japan BOJ Monetary policy decision and EZ GDP
Tomorrow: EZ Trade balance and US Preliminary Michigan consumer sentiment.

Technical key points
EUR/USD is bullish, target 1.3830, key reversal point 1.3125.
EUR/GBP is bullish target 0.8830, key reversal point 0.85.
USD/JPY is bullish, target 95.0, key reversal point 83.90.
GBP/USD is neutral.
USD/CHF is neutral.
AUD/USD is neutral.
NZD/USD is neutral.

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RTFX Ltd is licensed to conduct investment services business by the Malta Financial Services Authority. This information does not constitute an offer or solicitation and is provided for information purposes only. This information shall not be deemed to constitute advice and should not be relied on as such to enter into a transaction or for any investment decision. Any opinions expressed in this document represent the views of RTFX at the time of preparation. They are subject to change without notice. RTFX believes that the information contained herein is accurate as at the date of publication. No warranty of accuracy is given by RTFX and no liability in respect of any errors or omissions, including any third party liability, are accepted by RTFX or any director, officer or employee.

Emman Xuereb is a trader at RTFX Ltd.

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