Rumors of a currency war were all over the headlines the past couple of weeks, which isn’t all that surprising to me considering the recent trends in the forex market.
While the rise of the euro reflects the “market’s confidence” in the euro zone (Draghi’s words, not mine!), it has led to speculation that the ECB may have to intervene in the markets in order to keep exports competitive. Meanwhile, other central banks have started to take notice of how the yen has dropped across the board against all the major currencies.
That said, it’s no wonder that market players were paying close attention to the G7 and G20 meetings that took place recently.
In a statement that sounded quite similar to the G7‘s, all G20 countries agreed that they wouldn’t set specific exchange rates and that they would not delve into competitive devaluation to make exports more attractive.
However, the G20 didn’t rule out aggressive monetary policy measures that not-so-coincidentally would weaken the domestic currency of the central bank that chooses to delve in such measures. This basically gives any a central bank to weaken its currency if it wanted to!
Yep, you read it right! While the G20 thinks that devaluing a currency just for the sake of having a weak one is bad, using monetary policies to address domestic imbalances (which can achieve the same thing) is perfectly okay. If you ask me, it’s a lot like allowing kids to cheat as long as they use it to get into a good college and not just to pass a test.
But what else did we expect from the G20? With the Fed, BOJ, PBoC, BOE, and the RBA all weakening their respective currencies in one form or another, a strong stance against currency devaluation at the G20 meeting was a long shot at best.
Now that the G20 meeting has basically given the green light on using central bank tools to weaken its domestic currency, we’ll probably see more of the same jawboning, manipulation, and devaluation from the major central banks. Not only that, but I’m pretty sure we also haven’t seen the last of the “currency war” rhetoric. Soon a financial leader would cry foul, which could set off fresh talks on the issue and cause volatility in the charts.
For now it looks like the markets are back to selling the yen with the thought that the BOJ is going to continue to pop up measures to weaken it. Daily charts of USD/JPY, EUR/JPY, GBP/JPY, and even AUD/JPY are on their way up since Friday when the first draft of the G20 statement was released.
How long will the selloff last though? Are investors pricing in weaker currencies or will they listen to Draghi and make prices reflect its fundamentals?