In case you haven’t noticed, we are still in the throes of a global currency war.
That currency war is part and parcel of the ongoing, coordinated effort to keep monetary policy accommodative, a state of affairs that’s supposed to serve as a kind of garlic clove to the deflation vampire.
Of course if weaker currencies are good in terms of stoking inflation, well then that means that when one country starts easing, other countries have to follow that country down the easing rabbit hole assuming all the countries involved are similarly concerned about warding off deflation.
This creates a veritable race to the bottom and it’s still going on as evidenced recently by the ECB flagging FX appreciation risk in the minutes, the RBA scrambling around last month to walk back “excessive” aussie appreciation, Donald Trump insisting that the dollar was too strong back in April (needless to say, the wish implicit in that assessment has been granted), and the PBoC wondering what to do about a yuan that, thanks to the counter-cyclical adjustment factor added to the fix in late May/early June, is sitting near a one-year high against the greenback at a time when the domestic economy is slowing.
Here with more on all of this is SocGen’s Kit Juckes…
Via SocGen
It’s a feature of the low-inflation era that very few governments or central bankers want a strong currency. That’s just one reason why Bitcoin is doing so well. Strong currencies depress inflation, at least temporarily, and if their impact on competitiveness is exaggerated, it’s still enough to make them take the blame for jobs being lost to other cheaper-currency producers. Once upon a time all this was offset by a sense that a strong currency was a sign of national virility, but such superstition is passé. It’s all about a total eclipse of the sun, today….
The problem with no-one wanting a strong currency, is that someone has to lose out. This year, the winner in the FX stakes, (or loser, in a topsy-turvy world where a strong currency is no kind of blessing) is the Mexican peso, reflecting two of the main underlying themes in markets: Trump deflation and the strong current of cash flowing towards emerging markets. The strength of the Zloty and Koruna reflects the fact that the real winners from the European economic recovery aren’t in the euro area but are countries held back by European policies. SEK and NOK both still look like winners.
This week kicks off a bit groundhog-day-ishly, ecliptic excitement and the prospect of Janet Yellen and Mario Draghi speaking at Jackson Hole notwithstanding. The euro is still hampered by an excess of long positions and has still moved far ahead of anything justified by interest rate adjustments. It needs a position clear-out and a jump on Bund yields to recharge its batteries and I can’t see either happening this week. CFTC data suggest the euro long has been marginally reduced, and the dollar short likewise, but not by enough to change anything. The yen short is being pruned back more vigorously, but while that opens the way for a weaker yen if bond yields start rising globally, I’m struggling to get excited about that, either.
Wariness of a further euro clearout makes sterling an easier short than the euro in the short run. It was last week’s worst G10 currency but shorts in GBP/SEK and GBP/NOK still appeal, and short GBP/CAD or GBP/AUD is more attractive than short GBP/USD or EUR/USD.
For the wider dollar story, as for EUR/USD, I found plotting relative yields against EUR/USD and DXY interesting. The DXY chart, against DXY-weighted 10year real yield differentials, is still correlating furiously and suggests for all the world that the dollar’s short-covering bounce is running out of steam. On a morning when US 10year yields are opening just under 2.2%, I can see that. Contrast it with the EUR/USD chart, and there I see no encouragement for a euro bull at all in the short term. That doesn’t stop me being a long-term euro bull but it does suggest that the wises path this week and next, may be to be long neither euro or dollar. Which is probably good news for EMFX in general, as well as for AUD CAD, NOK and SEK.
