This weekend they all got together
The G7 birds of a feather
They finally decided
Their plans were misguided
It’s spending cuts causing bad weather
The dollar remains the strongest currency around this morning, touching 5 year highs against the yen, above 102, and reaching its highest level against the euro in more than a month. The weekend meeting of the G7 FinMins was notable for its lack of outcome. Essentially, all the stories that we had been hearing over the past several weeks; Austerity is killing Europe, Japanese policy is controversial, Free Trade pacts are coming back into vogue, were rehashed and confirmed. It remains incredible to me that any of the G7 leaders or central bankers could have the nerve to tell Japan that massive QE is inappropriate. After all, what exactly are the Fed, BOE and ECB doing themselves? So my guess is that the BOJ will largely be left to its own devices for now. We will not hear much from Kuroda-san about the yen, but rather consistently hear about inflation and inflation expectations as well as Japan’s economic growth. And how about the change in tone with regards to austerity throughout Europe? Two months ago, it was seen as the only way forward. This weekend, the players were falling all over themselves to describe the gentler means necessary to solve the Eurozone’s problems. Even German FinMin Schauble has softened his stance on the subject, allowing the idea that the rest of the EZ need not achieve German levels of spending efficiency in 2013, but can wait an extra year instead. Clearly, the social pressures of 27% unemployment in Spain and Greece and 12+% across the Eurozone are forcing a rethinking of policy in every European capital. How is this likely to impact the euro? My crystal ball sees further weakness on the horizon.
I think what is more interesting is the renewed focus on Free Trade pacts, which I think is the healthiest thing that the politicians have mentioned in quite a while. This morning’s Op-Ed in the WSJ by British PM David Cameron is encouraging to say the least. While I think there is limited opportunity in the current political environment in the US for a major trade deal, I do believe it is a more positive focus by global leaders. If you look at the Trans Pacific Partnership negotiations, and the controversy of allowing Japan to enter the talks, you can see just how difficult any trade pact between the US and Europe will be to achieve. It would, however, be a laudable and beneficial outcome for all involved were it successful.
Moving on to the markets, it has been a light data session, with only Japanese Money Supply numbers showing what we already knew, that the BOJ is adding money to the system; and Chinese data showing that the economy there is growing a bit slower than forecast, but still likely at its 7.5%ish rate. Retail Sales, Fixed Asset Investment and IP all were released there last night and all were just a bit lower than estimates. The proximate result of that data was further weakness in the Aussie, which is now firmly below parity and heading, as I have believed all along, toward 0.95 or lower. Remember, the RBA remains on the dovish side, despite the fact that recent data showing employment growth in Australia has been robust. Recent mentions of the AUD rate by RBA governors have shown a bit more concern with its strength, and I have come to believe that the recent rate cut was designed to help the currency weaken.
The euro, meanwhile, is back below 1.30 and seems set to drift lower still. I think this can be partly attributed to the weekend WSJ article that described the Fed’s thoughts on how to remove the current monetary stimulus. There was no indication that it was imminent, and that has been reconfirmed by recent comments from Chairman Ben, but the idea that it has become such a public discussion implies to many that it is sooner rather than later. Certainly, recent behavior in the Treasury market is indicative of concerns that zero interest rates are not actually going to be a permanent feature of the financial landscape. I will say that if the Fed does start to remove the stimulus, the dollar is likely to perform extremely well. So all you receivables hedgers out there, you need to keep a close eye on this topic. It will really change things.
This morning we get US data as follows:
Retail Sales -0.3%
-ex autos 0.3%
Business Inventories 0.3%
I don’t think it will have a huge impact on the FX market, but if the data is stronger than expected, it will surely add to the impression that many are getting about growth returning to the US. And almost certainly we will see further dollar strength in this event. Be prepared.