Investment Research
12 February 2013
FX Strategy There is no such thing as a global currency war The headline is ‘borrowed’ from an opinion by the former SNB chairman Philipp Hildebrand that appears in today’s Financial Times. Basically, Hildebrand argues that central banks are simply doing what they are meant to do and what they have always done. He argues that central banks simply set monetary policy to comply with their domestic mandates and with rates at the zero bound they have no other option than resorting to unconventional measures. He argues that this has nothing to do with ‘currency wars’ but he still fears that policymakers will try to grab the headlines at this week’s G20 meeting shouting ‘currency war’. We very much agree with Hildebrand’s view that the ‘currency war’ debate has reached an almost absurd level. We recommend that our clients take all the ‘currency war’ comments and warnings with a pinch of salt. At the end of the day, we doubt that the ‘debate’ is going to change much in the FX market both ahead of and after this week’s G20 meeting in Moscow. We got an important official response today to the ‘currency war’ debate. The G7 released the following statement. ‘We, the G7 Ministers and Governors, reaffirm our longstanding commitment to market determined exchange rates and to consult closely in regard to actions in foreign exchange markets. We reaffirm that our 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. We are agreed that excessive volatility and disorderly movements in exchange rates can have adverse implications for economic and financial stability. We will continue to consult closely on exchange markets and cooperate as appropriate.’ It is hard to argue that the rather short G7 message contains any news but this is good news. The key message is once again – as it is in the Hildebrand piece – that monetary policies will remain oriented towards domestic objectives. The statement supports our view that the yen sell-off will continue and that eurozone monetary policy will continue to be out of sync with the monetary policy of the Fed, the Bank of England (BoE) and the Bank of Japan (BoJ). Hence, if anything, the G7 statement should add support to the euro and further hurt the Japanese yen, as the big market concern has been that the G7 and later this week the G20 would be more focused on the BoJ given the latest yen depreciation. The G7 statement does not necessarily mean we will not hear more about ‘currency war’. Countries such as Brazil and France might still do what they can to put the theme high on the agenda over the next couple of days at and ahead of the G20 meeting in Moscow on 14-15 February.
Chief Analyst Arne Lohmann Rasmussen +45 4512 8532
[email protected] Analyst Jens Nærvig Pedersen +45 4512 8532
[email protected]
Important disclosures and certifications are contained from page 3 of this report.
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However, we believe that the risk of a temporary USD/JPY sell-off ahead of the G20 meeting has been reduced considerably with the G7 statement and not least after the US Under Secretary of the Treasury for International Affairs Lael Brainard yesterday said ‘we support the effort to reinvigorate growth and to end deflation in Japan’. Hence, investors looking for buying opportunities in USD/JPY ahead of the G20 meeting might be disappointed. Japan is currently doing something that is not very different from what the US has done previously, so it is very unlikely that the US will criticise Japan’s current policy and we still look for the Bank of Japan to continue with very aggressive monetary easing going forward. According to different media, France forced the concerns about the strength of the euro onto the agenda of the EU finance ministers meeting in Brussels yesterday. However, Germany has, not surprisingly, another opinion. Bundesbank president and ECB member Jens Weidmann yesterday said the euro is not overvalued and he warned politicians about talking down the euro. German Finance Minister Wolfgang Schäuble today added that ‘we have no exchange rate problem in Europe’.
What to make of the debate? First, we go as far as arguing that ‘currency war’ is not necessarily a bad thing. The term refers today to central banks that ease monetary policy – due to domestic mandates, for example, inflation and the growth outlook – and see a subsequent depreciation of their currencies. If we presume that this currency depreciation does not lead to trade retaliation, we should keep in mind that the aggregate result is a clear easing of global monetary conditions, which everything else being equal helps to reinvigorate global growth. Furthermore, we argue that the currency war debate is meaningless, as we live in a world with flexible exchange rates, and that unconventional measures are today a part of normal monetary policy to meet domestic mandates. Policymakers have to accept that we are now moving towards a period where global central bank policies are no longer fully synchronised as we have been used to over the last five years. The only difference from the years ahead of the financial crisis is that we now discuss instruments other than the relative rate differentials that drove the currency market through the Great Moderation. In the end, we think that Weidmann will win the battle at the ECB and Schäuble the political battle in the eurozone. So, if the ECB does not apply unconventional measures, it will have a tighter monetary policy than that of the Fed, BoJ and BoE – that’s how simple it is – and monetary policy will thus continue to be out of sync with the other major central banks. We know very well from the experience in January what the result of this out-of-sync policy is. The euro will continue to gain support at the expense of the JPY, USD and GBP until the ECB gives in and, for example, lowers policy rates. We doubt the latter is anyway near as long as EUR/USD does not trade above 1.40 for a sustained period. Hence, we continue to recommend buying EUR/USD, EUR/JPY and EUR/GBP on dips - currency war or not. We are due to publish our updated FX Forecasts on 15 February, when we plan to take the latest developments into account. We have been EUR bullish for a while and we are likely to pencil in even more euro strength in H1 13.
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Disclosures This research report has been prepared by Danske Bank Markets, a division of Danske Bank A/S (‘Danske Bank’). The authors of this research report are Arne Lohmann Rasmussen, Chief Analyst, and Jens Nærvig Pedersen, Analyst. Analyst certification Each research analyst responsible for the content of this research report certifies that the views expressed in the research report accurately reflect the research analyst’s personal view about the financial instruments and issuers covered by the research report. Each responsible research analyst further certifies that no part of the compensation of the research analyst was, is or will be, directly or indirectly, related to the specific recommendations expressed in the research report. Regulation Danske Bank is authorised and subject to regulation by the Danish Financial Supervisory Authority and is subject to the rules and regulation of the relevant regulators in all other jurisdictions where it conducts business. Danske Bank is subject to limited regulation by the Financial Services Authority (UK). Details on the extent of the regulation by the Financial Services Authority are available from Danske Bank upon request. The research reports of Danske Bank are prepared in accordance with the Danish Society of Financial Analysts’ rules of ethics and the recommendations of the Danish Securities Dealers Association. Conflicts of interest Danske Bank has established procedures to prevent conflicts of interest and to ensure the provision of highquality research based on research objectivity and independence. These procedures are documented in Danske Bank’s research policies. Employees within Danske Bank’s Research Departments have been instructed that any request that might impair the objectivity and independence of research shall be referred to Research Management and the Compliance Department. Danske Bank’s Research Departments are organised independently from and do not report to other business areas within Danske Bank. Research analysts are remunerated in part based on the overall profitability of Danske Bank, which includes investment banking revenues, but do not receive bonuses or other remuneration linked to specific corporate finance or debt capital transactions. Financial models and/or methodology used in this research report Calculations and presentations in this research report are based on standard econometric tools and methodology as well as publicly available statistics for each individual security, issuer and/or country. Documentation can be obtained from the authors upon request. Risk warning Major risks connected with recommendations or opinions in this research report, including as sensitivity analysis of relevant assumptions, are stated throughout the text. Date of first publication See the front page of this research report for the first date of publication.
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