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Article / 16 January 2013 at 12:55 GMT

"Currency Wars" giving JPY tailwind

Head of FX Strategy / Saxo Bank

EU’s Juncker warns on Euro strength. No, he has no ability to affect currency policy, but it does remind the market about the risks going forward as no country can devalue freely without notice in a weak growth environment.

Juncker’s rhetorical broadside against the Euro rally of late caught the market unaware yesterday. The damage was short and sharp and the market quickly stabilised as it is obvious Mr. Juncker has no ability to affect the course of . But if we look at the situation from the point of view of Europe – and for example Germany auto exports – it is rather obvious that a quick 20% revaluation in the JPY weaker against the Euro quickly begins to mean something and will quickly gain unwanted political attention. Mr. Abe and his government and the new Bank of Japan leadership on its way in March/April will find the going much tougher from here in their efforts to weaken the JPY – as the continuation of its weakening will aggravate what have already been termed the global currency wars, a term that was resuscitated by a bellyaching Russian official early today. It’s not comfortable for a significant raw materials exporter to sit and watch as its exports are priced in fiat currencies in nations that are all trying desperately to out-devalue one another.

For the EU – Japan relationship specifically, this is a very interesting situation, as Japan has also promised to buy ESM bonds, no doubt as it knows that its policies will not be popular in Europe and so that the country’s currency policy will warrant less negative attention. But Europe, particularly Germany, will quickly look past those bond purchases if the aggravated JPY weakness continues, as it will soon transform to a question of global competitiveness. The EU periphery has already lost that race and the recent Euro strength is another round of nails in their collective coffin as they desperately need a devaluation.

Looking ahead
The market continues to mull whether it is in consolidation mode on JPY weakness (and echoing a bit through the USD majors – EURUSD at 1.3250/00 is rather interesting – below there and the recent move higher begins to look fatally weakened.

I’m beginning to get a bit more bearish on GBP (expressed more through GBPUSD than EURUSD at the moment, especially if major EURUSD support ever gives way) as the EU tail risks having largely disappeared (could any new crisis be approached with ECB easing rather than people worried about owning various EU sovereigns – GBP won’t get the kind of bid against the Euro on a competitive devaluation angle that it got from a tail risk angle ) and GBP has none of the prospects that support the US dollar going forward and yet it has all of the US’ problems. It will be interesting to see how the GBPUSD pair reacts to the big 1.6000 support giving way here in the near term.

Look out for CPI and NAHB data up later from the US.

Stay careful out there.

Economic Data Highlights

  • Australia Jan. Westpac Consumer Confidence out at 100.6 vs. 100.0 in Dec.
  • Japan Dec. Domestic CGPI out at +0.3% MoM and -0.6% YoY vs. +0.2%/-0.7% expected, respectively and vs. -0.9% YoY in Nov.
  • Japan Dec. Consumer Confidence out at 39.2 vs. 39.4 in Nov.
  • Switzerland Nov. Retail Sales out at +2.9% YoY vs. +3.4% expected and +2.7% in Oct.
  • Euro Zone Dec. CPI out at +0.4% MoM and +2.2% YoY vs. +0.3%/+2.2% expected, respectively and vs. +2.2% YoY in Nov.
  • Euro Zone Core CPI out at +1.5% YoY as expected and vs. +1.4% YoY in Nov.

Upcoming Economic Calendar Highlights (all times GMT)

  • US Dec. CPI (1330)
  • US Nov. TIC Flows (1400)
  • US Dec. Industrial Production and Capacity Utilization (1415)
  • US Jan. NAHB Housing Market Index (1500)
  • US Fed’s Kocherlakota to Speak (1500)
  • US Weekly DoE Crude Oil and Product Inventories (1530)
  • US Fed Releases Monthly Beige Book (1900)
  • New Zealand Jan. ANZ Consumer Confidence (0000)


JV-Aro JV-Aro
Strong EUR can offset partially the risk taken for purchase of debt in Euro zone which investors will want and cheaper imports for materials , energy and so on in attempt to kick start the economy . Weak Eur will not improve competitiveness as it may seem on surface and to create inflation is the last think in that environment , that would be more dangerous than anything cheaper currency can hope for .


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