Article / 18 February 2013 at 10:04 GMT

Toothless G20 allows fresh JPY weakening, but…

Head of FX Strategy / Saxo Bank
Denmark

The G20 failed to produce any political hurdle for further JPY weakening for now, but there are plenty of other potential developments that could move the JPY either way in coming weeks. 

The new G20 statement did admonish members from policy explicitly targeting exchange rates, but the general impression from this meeting was that the statement was a bit of a cop-out and not particularly strong – this much is obvious in USDJPY pushing back above 94.00 at times this morning. It appears the G20 members are more afraid of spooking markets by unleashing hostile rhetoric recognizing the unfolding de facto currency war than the real effects of the war itself for now – which makes some sense given that currency moves are only felt with a considerable lag. It’s long been clear that the G20 is too unwieldy an organisation to expect any decisive policy initiatives of note, but I was still expecting more noise from the side lines, particularly among the EM members of the G20. Instead – it’s very quiet out there at the moment.

Given the rather toothless G20 statement, therefore, there is certainly no international political hurdle to prevent the JPY from weakening further and that is why we’ve seen the renewed selling – though it is still well within recent ranges. But in the bigger picture, at these levels and with so many expectations from the BoJ built into the price, there is plenty of room for movement either way from other developments. Most important is who ends up being appointed as the new BoJ head. On that front, a Muto appointment appears to be gaining steam which is theoretically less JPY bearish than the other candidate names that have been circulated. And then there is the end of the Japanese financial year at the end of March, which could see considerable corporate hedging. In other words, yes, the G20 waved the white flag for now, but the market also has other fish to fry.

Euro jumps off support
The Euro jumped higher again after testing lower this morning. Euro strength seems to be the flipside of JPY weakness lately, and that is likely one of the drivers, as is the unanswered question: will the ECB be able to expand its balance sheet again? But we have plenty to worry about in Europe with questions looming over the Cyprus bail-out/in and the upcoming election in Italy, as long as spreads are quiet and risk is more or less on, the default direction for the Euro seems higher versus the JPY and the USD on the “relative balance sheet size” argument. That being the case, the picture for “risk” around the world is incredibly varied and doesn’t tell a consistent story. Contrast the very elevated US, Japanese and Australian indices, for example, with the recent meltdown in Brazilian and especially Mexican equities, not to mention the weakening in European markets due to the strong Euro. 1.3300 looks like an important line in the sand this week to see if this consolidation turns into a rout.

Chart: USDCAD
USDCAD upside is looking interesting again after the pair took a stand near the parity level last week and rallied sharply. The 1.0100 area is key resistance and a close above could open up for 1.0400+.

usdcad

Looking ahead
Remember that today is a US bank holiday (President’s Day).
All eyes on the Italian election this coming weekend, with the focus on the considerable number of undecided voters and which way they will swing. The stronger the results for Berlusconi and the dark horse (and comedian!) Grillo and his Five Star Movement, and the greater the risks of political instability that could play into a new worry about systemic EU risks. The outcome could be an important test for Europe.

Look out for the BoJ meeting minutes and RBA meeting minutes tonight in Asia. Germany’s ZEW survey for February is up tomorrow and the IFO on Friday. Wednesday sees BoE and FOMC meting minutes. and Thursday we have the preliminary read of Feb. Euro Zone PMI surveys and US CPI data.

Economic Data Highlights

  • New Zealand Jan. Performance of Services Index out at 52.6 vs. 51.5 in Dec.
  • Euro Zone Dec. Current Account out at +27B vs. +20.8B in Nov.

Upcoming Economic Calendar Highlights

  • Sweden Riksbank’s Ekholm to Speak (1030)
  • Japan BoJ minutes (2350)
  • Australia RBA Minutes (0030)

 

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