Currency chatter

February 11, 2013

With the rhetoric getting more heated, the three-year market fixation on bond yields could well be supplanted by currencies in the months ahead.

This week, everything points towards the first meeting this year of G20 finance ministers and central bankers in Moscow on Friday and Saturday. We’ve already got a clear steer from sources that even though France wants the strong euro on the agenda there will be little pressure put on Japan and others whose policies are pushing their currencies lower. Having urged Tokyo to reflate its economy last year, its G20 peers can hardly complain now that it has. That is not to say there won’t be lots of words on the issue though.

The Wall Street Journal has a piece saying the G7 – or at least its European and U.S. constituents – are planning a joint message ahead of the G20 to warn against a destabilizing competitive currency devaluation race. If true, this will have a big impact on the FX market.

There has already been some noise in Europe with France saying a medium-term target should be set for the euro but Germany refusing to play ball. ECB chief Mario Draghi indulged in a bit of gentle verbal intervention last week and EU monetary chief Olli Rehn was out over the weekend calling for “closer coordination” on currencies, noting the particular problems a strong euro would pose for southern, high debt members of the euro zone. On the other hand, ECB policymaker Joerg Asmussen said France’s problem was its internal competitiveness, not the euro.

The world’s top central banks are expanding their balance sheets by printing money, or at least not reversing course, while the ECB’s balance sheet is tightening, partly due to banks paying back early cheap money the central bank doled out last year. Neither does the ECB’s statute allow it to intervene directly to weaken the euro so it could well be the loser as others explicitly or implicitly follow policies that will drive their currencies down. That’s the last thing a still struggling euro zone economy needs, as Draghi observed.

On that note, Thursday is euro zone GDP day with nearly all member countries reporting fourth quarter figures. We already know German GDP shrunk by 0.5 percent on the quarter, although that could be revised, and across the piece the figures will be ghastly with the euro zone recession, which it subsided back into in the third quarter, deepening. However, the survey evidence for January has shown some improvement.

Euro zone finance ministers meet today with the Cypriot bailout looming larger on their horizon. The first round of Cypriot elections take place the following Sunday with a president in favour of doing what it takes to secure outside help likely to result, so no decisions will be taken yet. But the ministers are looking closely at money laundering laws and how much Nicosia could raise from securitizing natural gas revenues.

Other than that, the Eurogroup will make little headway on banking union plans and whether the euro zone rescue fund should be allowed to recapitalize banks directly, as had been billed. With European Commission forecasts due the following week Olli Rehn may give an idea of what’s contained. Spain’s deficit target, in particular, is beginning to look like an unattainable holy grail – bar some highly creative accounting.

Having braved the Bundestag, ECB chief Mario Draghi will address the Spanish parliament which should be an easier crowd. Madrid seems nowhere near seeking outside help. Its yields are creeping up with a corruption scandal embroiling Prime Minister Mariano Rajoy’s party but it’s still shifted 19 percent of its annual issuance needs in the first six weeks of the year. However, if it becomes clear its debt-cutting drive is way off track and it will miss its deficit target badly, things could change. For his part, Draghi has said he is going in listening mode. With Italian elections approaching, its borrowing costs have also started to creep up. Rome will hold a three-year bond auction on Wednesday and sells one-year bills on Tuesday.

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