The currency wars have begun
Bank of Italy's Visco says the euro is weakening faster than expected since QE
I wonder if that's the consenus of all at the ECB ? And does that mean they approve or have concerns?
- QE carries risks of excessive rise in real and financial assets, prices,overshooting
- interest rates can not stay near zero forever
- must bring inflation close to 2% as quickly as possible
- latest Italian industrial production data tells us that we must be careful about excessive optimism
- Italy has a very low level of direct foreign investments, must not fear foreign capitals
The currency war is on for a long, long time, but FED started the way it is done now : as soon as QE started the war have begun. That was a war declaration 101
It started the moment when gold standard currency was abandoned by Nixon. That was a part of the cold war and it continues stronger then ever
Goldman Sachs has a stunning new forecast for the euro
In six months, Goldman Sachs thinks the euro will reach parity with the US dollar.
In currency markets, "parity" is when two currencies have the same value, or a 1:1 exchange rate.
The euro has fallen considerably over the last year and is currently at around 1.05 to the dollar. The euro hasn't been at parity with the dollar since late 2002.
In a note to clients on Friday, Goldman's Robin Brooks wrote that while the euro went "sideways" against the dollar following the ECB's QE announcement, the firm sees the impending change in US monetary policy and portfolio outflows from Euro area residents as drivers of the latest leg lower in the euro against the dollar.
Brooks:
We ... update our forecast to 1.02, 1.00 and 0.95 in 3, 6 and 12 months (from 1.12, 1.10 and 1.08 previously), as well as 0.85 and 0.80 at end* 2016 and end* 2017 (from 1.00 and 0.90), respectively. We therefore expect more downside in the near term, with the expected removal of "patient" at next week’s FOMC a key catalyst. In the longer term, we continue to believe that EUR/$ will significantly undershoot our GSDEER measure of fair value (around 1.20), reflecting diverging growth and monetary policy outlooks.
So not only does Brooks see the euro at parity with the dollar in just six months — and the euro trading below equal value to the dollar in a year — but over the next couple years Goldman expects the euro to fall to record lows against the dollar.
And as for the recent action in the dollar rally and the euro decline, Brooks says that the divergent forecasts on economic growth and monetary policy — slower growth and looser policy in Europe against stronger growth and tighter policy in the US — the EUR/USD trade "just isn't stretched."
"If anything, it seems to us that the market continues to play catch*up with the strong Dollar theme," Brooks added.
In a separate note to clients on Friday, Goldman equity strategist David Kostin said the dollar's rally "dominated" discussions the firm had with clients last week.
Kostin:
Investors are concerned about the impact of the strength of the USD on S&P 500 earnings growth and stock market performance. Historical returns and our earnings model indicate that direct impacts of a stronger dollar on index-level equity performance are small, but indirect impacts could be larger should USD appreciation weigh more heavily on economic growth, particularly in the US. We recommend US stocks with high domestic sales
And for some perspective, here is the history of the euro against the dollar, giving you a great picture of just how far and how fast we've seen the euro fall this year.
U.S. urges allies to think hard before joining Asia development bank
The Obama administration on Tuesday urged any country joining a China-led development bank to question whether the institution would adhere to high standards in terms of avoiding corruption and protecting worker rights and the environment.
"Our point all along has been that anyone joining needs to ask those questions at the outset," Lew told U.S. lawmakers when asked about the intention of several U.S. allies in Europe to join the institution. "I hope before the final commitments are made anyone who lends their name to this organization will make sure that the governance is appropriate."
The one simple reason the global FX war will rage for years to come
Japanese leaders believe that a weak currency is key to growth.
Japanese news agency Nikkei surveys about 145 top executives each quarter to gauge the mood on the economy. The good news for Japan is that respondents are far more upbeat. Almost 75% say the economy is expanding (although modestly), that's up massively from 40% in the December survey.
The usual suspects showed up on the list of the reasons why. About 37% cited a stronger US economy and 29% noted lower energy prices but the majority -- 52% -- cited the 'well-established weak-yen trend.'
FX weakness is quickly becoming to tonic for every weak economy. Whether currencies are as important as executives believe or not probably doesn't even matter at this point because in the 2015 economy, executives are the real leaders and the politicians are pandering populists. If Japanese CEOs think a soft currency is boosting their stock prices then it won't be long before others think the same and politicians everywhere will be along for the ride.
How many executive bonuses have been paid out for better stock performance because of pure FX devaluation? What's easier, building a better business or lobbying the government to weaken the currency?
Schaeuble: Low Rates Causing 'Huge Problems' in Germany
The current period of ultra-low interest rates is causing considerable problems in Germany and there is an increased risk of a bubble forming, the nation's Finance Minister Wolfgang Schaeuble warned on Tuesday.
"We have an interest rate environment that is causing huge problems for us in Germany, this is out of question" Schaeuble said at a banking event in Berlin. "The interest rate level is of course too low for Germany."
"A low interest rate leads to a misallocation of resources with all the risks and side-effects that you see when bubbles are forming," he added.
German fears
Although he stressed he wanted to refrain from direct criticism of the bank - as it must defend its inflation target - he claimed there was too much central bank money and debt in the world.
"This is no criticism of the ECB's monetary policy, this is a structural problem," he said.
Schaeuble's comments mirrored remarks from another high-profile German policymaker - the Bundesbank chief Jens Weidmann. On Wednesday, he particularly warned of overvalued urban house prices in Germany, suggesting that ultra-loose monetary policies may be fueling a housing bubble in parts of its largest member country.
"Bundesbank calculations suggest that by now in cities there are clear overvaluations" in residential real estate, Weidmann said in Munich. "We reckon that prices are between 10% and 20% above the levels that are fundamentally justified. In the hip neighborhoods of big cities, the overvaluation may be more."
China's devaluation raises currency war fear as Greece strikes deal
China's shock 2 percent devaluation of the yuan on Tuesday pushed the dollar higher and raised the prospect of a new round of currency wars, just as Greece reached a new deal to contain its debt crisis.
Stocks fell in Asia and Europe as investors worried about the implications of a move designed to support China's slowing economy and exports.
The stronger dollar hit commodity prices, driving crude oil down after Monday's hefty gains.
Weaker stocks lifted top-rated bonds, with yields on euro zone debt also falling on the Greek deal, struck nine days before Athens is due to repay 3.2 billion euros to the European Central Bank.
China's move, which the central bank described as a "one-off depreciation" based on a new way of managing the exchange rate that better reflected market forces, triggered the yuan's biggest fall since 1994, pushing it to its lowest level against the dollar in almost three years.
The Australian dollar, often used as a liquid proxy for the yuan, fell 1.1 percent to $0.7324 as the U.S. dollar rose 0.4 percent against a basket of currencies before paring gains.
In Asia, the Singapore dollar hit a five-year low while the Malaysian ringgit and the Indonesian rupiah hit lows not seen since the Asian financial crisis 17 years ago. The Japanese yen hit a two-month low of 125.08 to the U.S. dollar.
The euro, buoyed by the Greece deal, rose 0.1 percent to $1.1022.
U.S. reaction will be crucial. Washington has for years pressed Beijing to free up the exchange rate to allow the yuan to strengthen, reflecting the growth in the world's second-largest economy.
Today, China's economy is slowing and the new exchange rate mechanism gives markets greater ability to push the yuan lower, just as the United States prepares to raise interest rates - a step that should add to dollar strength.
"It does look, however modest, like an attempt to recoup just a small amount of competitive edge lost in international markets," said Simon Derrick, head of currency research at BNY Mellon in London.
"What happens over the next few days matters. If we have a currency that moves much more freely, fine. If, however, we go back and it's just repegged ... that is currency war."
European shares fell. The pan-European FTSEurofirst 300 index was down 1 percent, led lower by car makers and luxury goods companies, whose products have just got more expensive for Chinese consumers. Shares in Athens rose 1.9 percent, however, making it the only European bourse to rise.
This followed falls in Asia. MSCI's broadest index of Asia-Pacific shares outside Japan gave up early gains and was down 1.4 percent at its lowest since February 2014. Japan's Nikkei slipped 0.4 percent.
On Chinese stock markets, airlines and importers fell, though exporters rose. The CSI300 index of the largest listed companies in Shanghai and Shenzhen lost 0.4 percent and the Shanghai Composite closed flat.
What yuan move means for September Federal Reserve rate hike
China’s central bank devalued its tightly controlled currency early Tuesday, fueling speculation that the move could delay the first interest-rate hike by the Federal Reserve in nearly a decade.
The yuan suffered its largest one-day loss in two decades following the surprise move, with the dollar USDCNY, +1.8405% jumping to buy 6.3294 yuan, according to FactSet. That’s up from around 6.2058 earlier on Tuesday. The yuan had been trading in a tight range in recent months, mainly due to Beijing’s intervention in the foreign exchange market. Read: China ramps up the risks for investors and its economy
The dollar’s strength against major global currencies has taken a toll on U.S. exports in recent quarters, and the Fed is closely watching the effects on the economy as it debates whether to raise interest rates, a move that could make the dollar even more appealing.
The People’s Bank of China’s decision to allow the yuan to devalue by 1.9% is feared by some to be the opening salvo in a new currency war. The Chinese central bank stressed the move was a one-off depreciation to allow its currency to be driven more by market forces, but analysts fear the PBOC has more moves up its sleeve. Read: China’s surprise can keep the market’s Fed-fueled party going
Here are some analysts’ initial assessments of the devaluation:
“The question now is whether other central banks will follow suit and devalue their own currencies in some way in an attempt to ring-fence their own export markets, something that could further harm U.S. companies. They are already facing a battle to compete as a result of the strong dollar, which was likely to be further hampered by a rate hike from the Fed when it raised rates... A [Fed] rate hike this year already appeared to be on a knife edge, this could be enough to tip it over into next. That may now depend on the actions of other central banks.” — Craig Erlam, senior market analyst at Oanda
“What is of interest is how the U.S. will react to this move. It will almost certainly cause [Fed Chairwoman] Janet Yellen and the Fed more problems and could possibly kill off the September rate hike, as any further gains by the U.S. dollar could cause more problems for the U.S. economy... . It is clear that the ‘currency war’ is back, which will make the next few weeks very interesting.” — Nour Al-Hammoury, chief market strategist at ADS Securities
“It’s quite likely that the larger-than-expected fall in exports in July that was announced over the weekend had something to do with the move. I’ve been saying for some time now that the slowdown in global trade, plus the deflationary pressures from falling commodity prices (which themselves may be just a symptom of falling demand, too) would be likely to restart the ‘currency wars.’ Now we have the first shot fired. Although China said this was a one-off move, other countries are likely to be wary. Who will be first to react?”
“I doubt if it will derail the Fed’s plans to tighten, but it may well slow the pace of their tightening. It could have a bigger impact on the actions of the Bank of England, where the mandate is focused entirely on inflation. ” — Marshall Gittler, head of global FX strategy at IronFX
“Coming on the back of yet another set of poor export readings, the timing of the move is certainly not ‘happenstance’ and per se raises the suspicion that this was far from a ‘one-off’ move... Let us also not forget that China’s Real Effective Exchange Rate (REER), as calculated by the , has risen by some 14% in the past year, today’s 2% drop pales into insignificance. Of course, markets that are already fretting about Fed rate liftoff will not appreciate this surprise, but in truth, this has been coming for quite some time.” — Marc Ostwald, FX strategist at ADM Investor Services
“How important is this? For China, it matters a lot. For global currency markets, it is a major change. But for the global economy, the impact should be pretty small... All in all, this may be a step for China to make its currency a little more flexible, and manage it more relative to a genuine basket of other currencies, rather than mostly relative to the U.S. dollar. It introduces an additional element of volatility into global FX markets. However, this adjustment does not affect the outlook for, say, European exporters to China very much.” — Holger Schmieding, chief economist at Berenberg
EUR/USD falls mildly, in spite of completion of €86 bil Greek bailout
EUR/USD fell mildly on Friday but still closed considerably higher for the week, as international creditors approved a comprehensive third bailout for Greece on Friday night hours after the Greek Parliament ratified the deal.
The currency pair traded between 1.1098 and 1.1189 on Friday before settling at 1.1113, down 0.0037 or 0.34% on the session. For the week, the euro gained approximately 1.4% to move slightly positive against the dollar over the last month of trading. The dollar ended the euro's three day winning streak on Thursday by inching up 0.07% for the session.
EUR/USD likely gained support at 1.0808, the low from July 20 and was met with resistance at 1.1213, the high from August 12.
In Brussels, the euro group of finance ministers approved a deal on Friday night to provide Greece with up to €86 billion in stimulus aid, drawing upon the framework of an agreement agreed earlier this week. Euro zone officials anticipate releasing the first tranche of funding, a reported sum of €26 billion, next Wednesday in advance of a bond obligation due to the European Central Bank on August 20. In addition, a reported €10 billion is being set aside to help recapitalize a host of Greek banks that remain on the verge of bankruptcy.
The remaining portions of the initial tranche this year could be paid by the end of the fall, euro group leaders said during a press conference on Friday night. Greece's willingness to enact significant pension reforms over the next several months could compel the International Monetary Fund to participate in the bailout program by October, said Jeroen Dijsselbloem, head of the euro group.
Elsewhere, the U.S. Department of Labor's Bureau of Labor Statistics (BLS) said Friday that its Producer Price Index for final demand (PPI-FD) rose by 0.2 for the month of July, as a spike in trade services pushed wholesale prices up moderately. Analysts expected an increase of 0.1 in the headline reading for the month. In spite of the monthly gains, the index still remained down by 0.8 on a year-over-year basis.
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Central banks around the globe are rushing to ease monetary policy as looming deflation and still-weak commodity prices weigh on growth expectations.
On Wednesday, the Bank of Thailand cut rates, joining several of its neighbors in easing monetary policy.
On Monday, the European Central Bank began its massive 60 billion-euro-a-month bond-buying program, making it more difficult for central banks to keep their currencies fairly valued against a rapidly weakening euro.
Mohamed El-Erian has described it as “accidental,” but however you characterize it, it’s hard to deny that a global currency war has already begun.
Here’s a map showing which central banks have fired their opening salvo in 2015.
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