The G-20 statement did not single out Japan, but we cannot expect more significant weakening, as the yen has already weakened in a magnitude seen only once in 5 years or so, says Simon Smith of FxPro.
In the interview below, Smith also discusses the state of the US consumer, the impact of the European GDPs on the ECB, the kiwi’s place in currency wars and the “rotation”. Currencies could actually be influencing stock markets. Enjoy!
Simon has over seventeen years experience of macro forecasting and investment strategy research. Prior to joining FxPro in May 2010, Simon was a consultant with Thomson Reuters, having spent four years as Chief Economist at Weavering Capital.
He has held economic and strategy positions with Standard & Poor’s, together with consultancy firms 4Cast and MMS International.
Simon holds an MSc. in Economics from the University of London and a BSc. from Brunel University.
1. Does the G-20 communique open the road to further significant yen weakening?
– No. At least I would certainly caution against significant weakening. The move in the yen (in absolute terms) seen in the past 3 months is of a magnitude that has only happened every five years or so. In other words, it’s pretty rare. When you combine this with what the Japanese authorities have actually done (vs. what they have promised to do in the future), then there’s a case for seeing a lot more two-way traffic in the yen, which is likely to keep it in the 92 to 96 range on USDJPY in a much less trended market.
2. Wal-mart warned about “disastrous” sales so far in February, blamed on the expiration of the payroll tax break. Is this tax expiration a reason to be worried about for the US economy?
I would not say this is the primary reason to be worried. Taxes are rising for the majority of Americans this year, but this does come on the back of minimal growth in real incomes and continued labour market weakness, on top of the continued uncertainty on the spending sequester. I think the point is that retailers, households and the government just have to face up to an economy less dependent on debt-financed consumption, something which has not fully hit home to any of those sectors.
3. Euro-zone GDP numbers fell short of the already low expectations. Could this drive the ECB to action on the lending and/or deposit rates?
For the moment, I doubt it. Despite the recent GDP weakness, the periphery are benefitting from the “Draghi put” delivered via his promise to do “whatever it takes” to save the euro. Market rates are already low and the ECB appears wary of the complications that would come about from negative deposit rates.
4. NZD/USD reached levels last seen in mid-2011. Could further strength of the kiwi lead to a rate cut?
The latest comments from central bank Governor Wheeler were successful in weakening the kiwi, but it remains some 2% above the average of the past 6 months. I think the authorities are aware that they don’t want to be one of the losers (i.e. see their currency strengthen) if we see an escalation of the so-called “currency wars”. I would expect such rhetoric to be preferred to rate cuts, with the main impact being to delay possible rate rises to the tail end of the year, or early 2014.
5. There has been a debate about a “rotation” from investments in bonds into stocks. What do you think about it? Can such a move strengthen specific currencies and weaken others?
In general, the motivation comes more from a belief that bonds are rich, rather than equities being attractive. There’s a simple merit to this from the fact that much of the total return from bonds in the past 2 years has come from price appreciation in a move to a sustained zero rate world. There’s a limit to that, combined with the greater risk that debts are either inflated down by the authorities or investors demand more of a premium for default risk (more likely it will be a combination of both). Currently, we are seeing currencies less dependent on what central bank balance sheets are doing and more sensitive to economic data developments. As such, I think the causation is more the other way, so currency moves are driving stock markets. I think this is most evident in Japan, as the weaker yen supports stocks (increasing the Nikkei/USDJPY correlation). We’re also seeing it, although less marked in the UK, where the weaker currency is boosting those sectors that earn in dollars, principally oil/gas, naturally resources and mining. I struggle to see the causation the other way for now, the main exception being sterling should overseas investors (who hold around 40% of the market) start to lighten up, fearful of a more sustained fall in the currency.
Further reading: US Debt: Can kicking is seen as positive, but the can can get huge