The Yen, currency wars and other misdemeanors
After a pronounced period of decline last week and early yesterday, the USD-JPY pair bounced higher overnight ahead of the closely watched Bank of Japan policy decision on Thursday. Traders drove the Yen higher across the board last week following comments from Japan's Finance Minister Aso, who said the Yen has weakened "more than then we [the Government] intended". His comments appear more of a timely effort to deflect some of the negative attention ahead of the G20 summit this week, for which we can expect the topic of 'currency wars' to dominate the proceedings.
Socialist Francois Hollande will lead France after Nicolas Sarkozy got ousted by voters fed up with austerity. In Greece, the far-left and far-right have made big gains. But it may not be time just yet to start worrying about the fate of the euro zone.
The term 'currency wars' refers to a central bank or government pursuing a weaker currency by means of policy. Inadvertent or not, It's abundantly clear major economies from the United Sates to Japan are engaging in a currency war by proxy, given their efforts in recent years to rejuvenate respective economies using policy easing tools such as quantitative easing. While central bank easing programs such as quantitative easing may not be specifically employed to weaken a currency, it's clear the consequence is a outcome central banks and governments are all too happy to accept.
'Open mouth operations' can also be a powerful tool. ECB President Mario Draghi merely flagged the negative repercussions of strong currency last week before markets swiftly took some of the froth off the top of the Euro.
The premise of a grand stimulus offensive has seen the Yen depreciate near 25-percent against the Euro since former Prime Minister Noda announced his intension to dissolve parliament, making way for current prime minster Shinzo Abe to begin his Yen assassination. At the time of writing the Yen is testing Y94 against the greenback and just off daily highs of 125.93 against the Yen.
Aussie under pressure; Euro resumes northern trajectory
The Aussie dollar remained under pressure overnight following a pull-back below the 103-handle late in the domestic session. Liquidity is lighter than usual given the drop of market participants across Asia, with major bourses closed for the Lunar New Year celebrations. Moderately weaker U.S equity markets also did little to inspire a breakout, while flows back to the Euro and Yen encouraged residual weakness.
Meanwhile, yesterdays home loan activity data showed the domestic data pulse continues beat weaker than the Reserve Bank would prefer. New home loans dropped 1.5 percent in December against economist's expectations of a flat result. We saw a similar theme of weakness across loan values and investment lending for December.
Overall, recent economic feedback supports the case for the RBA to ease in the second-quarter and investors are reacting accordingly. Still, we need to consider how much 'bad news' is baked in , and a light week on the data front will place risk currencies such as the Aussie at the mercy of sentiment abroad for which releases such as U.S retail trade and other themes will be a key barometer.
With the exception of the Euro and Kiwi, the greenback strengthened across the board with solid gains noted against Japan's Yen, Sterling and CAD.
The Euro resumed its climb overnight following comments from Bundesbank chief Jens Weidmann who said the Euro is not seriously overvalued, adding "An exchange-rate policy to specifically weaken the euro would lead to higher inflation in the end." His comments are seemingly at odds with ECB President Mario Draghi last week who noted currency appreciation could lead to a fall slowing inflation.
The Euro climbed back above 134-figure overnight but was unable to pierce short-term resistance around the $US1.3430 levels. Markets are currently standing-by for feedback from the Euro-group meeting which will see conditions surrounding a bailout package for Cyprus high on their agenda. At the time of writing the Euro is buying 1.3390.
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