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(Oct. 5, 2009 - Erwan Mahe) Not much to say this morning, although we are happy to note that the currency balances (and imbalances) we have been monitoring closely in recent days are on the front burner.
While central banks, like the SNB have long identified the dangerous deflationary effect of overly strong currencies and have taken the needed measures to remedy the situation via interventions on currency markets, it seemed until a short while ago that Japan and Europe were resigned to the competitive devaluations of their British, American and, by ricochet, Chinese partners, thereby, putting just that much more pressure on economies whose GDP growth had suffered unprecedented contractions in 2009.
Japan is a case apart, since investors have to decrypt the comments of the new finance minister, a source of volatility last week! Moreover, the yen is often used as a proxy for the Yuan to bet on a rebound in Asia from which Japan would benefit, and it is not always possible to invest directly on the Chinese currency.
In Europe, we seem to be cumulating the worst of two worlds, because the Eurozone must now contend with the dilemma of anaemic growth, at best; and heightened competition due to currency movements, not just from American products, but also from Chinese ones, since the PBoC continues to direct the Yuan.
While the ECB remained unruffled by the euro’s strength in 2008, when dollar-denominated commodity prices were surging to record highs (oil at $150/barrel, but also the Baltic Dry Index at 11,700), the currency’s strength today makes no sense whatsoever with oil at $70 and the BDY at 2,350!
We have noted with interest in recent days the rising chorus of comments by European political leaders and monetary official to cool it.
Following the green light given by Mr Trichet and Mr Steinbrueck, commented by us in recent days, there has been an avalanche of warnings:
Lagarde: Chinese are a key player in currency discussions; issue not addressed at G20, but it will come; issue of currencies needs to be addressed.
“The European economy is not doing badly but it’s not doing so well that its currency can be the ultimate recourse. We need a rebalancing so that one currency doesn’t take the flak for the others.”
Nowotny: Need no immediate action on global Forex developments; agree Euro FX no major threat now, but must watch; But everyone observing global Forex developments.
Jean-Claude Juncker, Eurogroup Chairman: U.S. authorities are "perfectly right" to note periodically that a strong dollar is in U.S. interests. "We are interested in continued ongoing dialog with China" regarding Forex issues.
Quaden, governor of the National Bank of Belgium: excessive volatility in foreign exchange rates was in no one's interest and should be avoided. The problem is not the exchange rate of the dollar against the euro, but rather the relationship between the dollar and certain Asian currencies, to mention one, the Chinese Yuan. I say no more.
Axel Weber, European Central Bank Governing Council member: Comments that a strong dollar is in the interest of the U.S. are welcome.
Jean-Claude Trichet, European Central Bank President, asked about the failure of the Chinese to respond to past G-7 exhortations on the Yuan exchange rate: we have the same message for our Chinese partner, and the best way to demonstrate that we have exactly the same message" is maintaining the same wording
Some emerging economies must allow their currencies to strengthen against the euro and the dollar.
Some currencies “have in the medium run to appreciate vis- a-vis the dollar and the euro”.
Timothy Geithner, U.S. Treasury Secretary: the United States government will "do everything" it can to "sustain confidence" in the U.S. dollar.
Mark Carney, Bank of Canada Governor: the bank would do what is required to achieve its inflation target amid concerns about deflation. "Look, I'm not closing off any options." "I think at a minimum what one expects is that professed policy frameworks are followed, and China does have a commitment to increase flexibility of their exchange rate and one expects that to be realized."
Communiqué du G7: Welcome China FX flexibility; should mean continued Yuan appreciation; will continue to monitor exchange rate markets closely, cooperate as appropriate; excess volatility, disorderly FX moves adverse for stability.
·Lorenzo Bini Smaghi, European Central Bank Executive Board member: China should follow a more independent monetary policy. “I think the best way is that China starts adopting its own monetary policy and detach itself from the Fed’s policy.
Impressive, isn't it?
I am not ready to bet on the timing and potential consequences for the different asset classes, but I lend toward caution in case major manoeuvre (and pressures) are in the works…
-- Favourable to fixed interest rate instruments, with a now more favourable bias to the 5-10 year range.
- On stock markets, we have returned to a negative bias after hitting our target range of 2850-2900 on the Eurostoxx, with, for example, the October put ladders. We did not advise an overly aggressive hedge strategy because the fact that indices rebound after each plunge highlights the persistent desire to invest of laggards frustrated by 0% interest rates.
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