Forex Markets Seen as a Global Competitive Event

There is global unrest amongst leaders as they assess overt and covert efforts to influence the relationship of currencies. Little notice was paid when Switzerland pegged the franc to the euro, perhaps because there was little international impact. It was different, however, when the Japanese decided to elect a leader who vowed to weaken the yen. After years of deflation, three recessions in five years, this sounded like the perfect elixir.

Prime Minister Abe’s plans include persuading the Bank of Japan to increase the money supply which would be used for capital improvements in Japan, and to invest money overseas in USD and euro bonds. Abe has been successful talking the yen lower but this has caused alarm in Japan as well as abroad. Domestically, the Japanese are now rightly fearful their food and energy costs will increase.

And Bloomberg reports:

“The world is on the brink of a fresh “currency war,” Russia warned, as European policy-makers joined Japan in bemoaning the economic cost of rising exchange rates.

“Japan is weakening the yen and other countries may follow,” Alexei Ulyukayev, first deputy chairman of Russia’s central bank, said at a conference today in Moscow.”

The yen’s depreciation combined with the perception the euro crisis has been solved has sent the euro soaring. This has caused Luxembourg Prime Minister Jean-Claude Juncker to complain the euro is “dangerously high.”  Are the European elites becoming aware now, the “Draghi put,” which wards of the bond vigilantes and elevates the euro, hurts the economy?

So far the Americans have not joined in the discussion, but rather respond by example. In a speech, Eric Rosengren, President of the Federal Reserve in Boston, said the Fed has the capacity to buy more than the $85B loans per month.  In other words, they have the ability to print even more money should there be a currency war.

Yesterday we received the Treasury International Report (TIC) which showed a strong inflow of money into the US during November. The net buying of US long-term securities was $52.3B, up from $1B in October. The purchase of US Treasuries was $26.4B, up from $12B in October. China bought $200M of Treasuries, Japan $900M taking their holding up to $1.17T, and $1.13T respectively. 

It is interesting to note that the UK, Germany and France all were buyers of US Treasuries during November. The US may have been viewed as a safe haven from a euro crisis during this period. Continuing into 2013, there may have been a reversal of the currency direction resulting in euro-buying and USD-selling. Continuing in that vein, there may also be safe haven funds flowing from the pound back to the Continent.

The euro has been doing quite well versus the pound, having appreciated from under 78 to the current level of 83. We do have PM Cameron scheduled to make a speech on Friday regarding the future of British participation in the EU. If the EU membership were put to a vote in Britain, how would that vote go?

EURGBP Weekly 16 January 2013, CashBackForex Market Analysis

Markets appear to be moving at the whim of political statements. We would be inclined to be a seller of the EURGBP but are wary of the content and market reaction to the PM’s Friday speech.

Written by CashBackForex.com