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.