♠ Posted by Emmanuel in Currencies at 11/03/2010 12:08:00 AMAnd so we return to the frontlines of "international currency war" as declared by Brazilian Finance Minister Guido Mantega. Last month, G20 finance ministers (with the notable exception of Mantega) signed off on a communique vowing to "move towards more market determined exchange rate systems that reflect underlying economic fundamentals and refrain from competitive devaluation of currencies." However, it's been so much bluster as we prepare for an immediate test of these rather hokey ideas. Simply put, the bigwig nations are all going to announce policy rate decisions within 33 hours of each other--it's quite a rate occurrence that these decisions come one after another is such a short span of time. The US Federal Reserve will get things rolling, with the Bank of England, European Central Bank, and the Bank of Japan all set to do the same over the aforementioned time frame.
As someone who's worked as a journalist before, I appreciate a good headline when Bloomberg says "Thirty-Three Hour Race Many Induce EU Surrender." Which, strictly speaking, is not really correct since that's the total time between the first (FED) and last (BoJ) reporting. Nevertheless, the main idea is that the Europeans--uniquely hawkish among the big 4 as ECB President Jean-Claude Trichet has said "stimulate no more"--may nevertheless be forced to take expansionary policies against their will. With the Americans set go on the offensive by strafing the world economy with nearly unlimited dollar emissions via now-famous Bernanke helicopter drops, the EU's hand may be forced in following suit to ensure that rapid euro appreciation doesn't ensue. In effect, Jean-Claude "Stimulate No More" Trichet might be pressured to capitulate to Yankee dollar firebombing.
Not one to be left behind in the headline hyperbole sweepstakes, I believe I'm no slouch with clever phrases. So, after "international currency war" and "EU surrender," I'll do both one better and declare ourselves on the verge of "mortal kurrency kombat" commencing with the Fed decision:
Federal Reserve Chairman Ben S. Bernanke’s push to jump-start the U.S. economy this week may weaken the dollar, forcing at least one other central bank to add its own stimulus to offset a rising exchange rate. Bernanke is set to embark on an unprecedented second round of unconventional monetary easing, one result of which may be a cheaper dollar that boosts U.S. growth by helping American exports. A related consequence: stronger currencies abroad, threatening European and Japanese expansion.It's bloody awful, methinks, but we are where we are--every central banker for himself:
With the major central banks all announcing decisions within 33 hours this week, fallout from the Fed could cause Bank of Japan Governor Masaaki Shirakawa to do more for his economy and Bank of England Governor Mervyn King to leave the door open to more aid. Even as European Central Bank President Jean-Claude Trichet holds the line against inflation, he may eventually change course if the euro surges, while emerging markets are already acting to restrain currencies.
“An easing in U.S. monetary policy creates pressure on the rest of the world to respond,” said Dominic Wilson, New York- based senior global economist at Goldman Sachs Group Inc. in New York. “The subsequent weakening in the dollar tends to tighten financial conditions outside the U.S.”
This week’s meetings are the greatest concentration of monetary-policy action by leading central banks since the first week of October 2008, when they met in emergency sessions to fight the global financial crisis. On that occasion, all except Japan joined an unprecedented coordinated interest-rate cut.
Now they’re invested in dealing with their own challenges. Bernanke has signaled he will restart large-scale asset purchases to help reduce unemployment and raise consumer prices. King indicated last month he ultimately may favor buying more bonds to support the U.K.’s recovery as its government aims for the biggest budget cuts since World War II.
Shirakawa and his [BoJ] colleagues, after vowing to keep their benchmark interest rate at “virtually zero” last month and expanding their balance sheet, plan to buy exchange-traded funds and real-estate-investment trusts to beat deflation. Trichet nevertheless calls the ECB’s monetary-policy stance “appropriate.” The central-bank president is focusing on tougher fiscal discipline as the path to assure growth after runaway deficits led to Greece’s near-default and a continental debt crisis.
“It’s a nice idea to coordinate policy, but a central bank has to do what’s appropriate for its own economy,” said DeAnne Julius, a former Bank of England policy maker who is now chairman of Chatham House, an international research group in London. “It’s difficult to do otherwise economically and politically.”The "currency vigilantes" will likely punish the money-for-nothing crowd...
On Nov. 3 at about 2:15 p.m. in Washington, the Fed will release its policy decision. About 18 hours later, at noon in London (8 a.m. in New York and Washington), the U.K. central bank will announce its move. The ECB will go public with its decision 45 minutes later, at 1:45 p.m. in Frankfurt (8:45 a.m. in New York). The Bank of Japan concludes its talks on Nov. 5 at about noon local time (11 p.m. in New York).
Since Bernanke said Aug. 27 that his central bank was prepared to add stimulus if necessary, the Standard & Poor’s 500 Index has gained 13 percent, while the dollar has declined about 7 percent against a basket of six currencies. This may constrain initial market reaction to a Fed announcement of so-called quantitative easing, said Keith Hembre, Minneapolis-based chief economist at U.S. Bancorp’s FAF Advisors Inc., which oversees $86 billion...
Still, money managers at M & G Investments in London predict the rise of “currency vigilantes,” a play on “bond vigilantes,” the term coined by Edward Yardeni in 1983 for investors who would push down bond prices when they felt fiscal or monetary policies were running out of control. “Currency vigilantes punish those central banks who print too much money by weakening their currency,” said Michael Riddell, a fund manager who helps M & G oversee about 178 billion pounds ($286 billion). “Over the longer-term, we’re bearish on the dollar and sterling.”...and we get to the poor Eurozone that may be whiplashed by all this foolishness. The Japanese are keeping a wary eye on the Fed as well and have the trigger finger on further intervention should it believe things are getting out of line due to blowback from the land of the free money:
The Fed will pledge this week to buy assets of $500 billion or more, according to 29 of 56 economists surveyed by Bloomberg News last week, while another seven predicted $50 billion to $100 billion in monthly purchases without a specified total. Estimates for the ultimate size of the program include $1 trillion by BofA-Merrill Lynch Global Research and $2 trillion by Goldman Sachs. Purchases of $500 billion would add as much stimulus as reducing the Fed’s benchmark rate by 0.5 to 0.75 percentage point, New York Fed President William Dudley said in an Oct. 1 speech...
The risk of the ECB’s tightening bias is that a stronger euro threatens exports, which have led the region’s recovery, as well as the ability of so-called peripheral economies such as Greece to escape deflation. The single currency has gained about 7 percent against the dollar since mid-September. Goldman Sachs predicts it will rise to $1.55 in a year from $1.39 at 4:23 p.m. in New York.As a parting shot, let me reiterate what so many others have said: If the US has not been successful in resuscitating its economy with massively expansionary policies, there is little reason to believe that comparatively less enormous sums meant to do the same will do the trick. Recent stock market movements are quite inexplicable insofar as all this free money is likely helping fuel a stock market bubble that fails to reflect the unlikely success of another round of easing.
Every 10 percent gain in the euro on a trade-weighted basis reduces GDP growth by 0.8 percentage point, while also lopping about 11 percent off European corporate earnings, according to an analysis by Credit Suisse AG strategists last month. That leaves businesses including Paris-based LVMH Moet Hennessy Louis Vuitton SA, the world’s biggest luxury-goods maker, and Siemens AG of Munich, Europe’s largest engineering company, vulnerable to a stronger euro, they said.
A continued advance may ultimately force the ECB to follow the Fed and add more stimulus, said Stephane Deo, chief European economist at UBS AG in London. The ECB may broaden the collateral it accepts for loans or even cut its benchmark interest rate from 1 percent, he said, adding that there’s a “low probability” of more asset purchases.
“The ECB will follow suit, in one way or another, in order to keep the euro appreciation at bay,” Deo said. Nobel laureate Paul Krugman said in an Oct. 28 interview that the ECB should emulate the Fed and carry out quantitative easing. For now, Europe’s central bank will stay on hold, said David Mackie, chief European economist at JPMorgan Chase & Co. in London. Policy makers believe the economy doesn’t need more aid and that providing it would fan inflation and ease pressure on governments to clean up their balance sheets, he said.
Bundesbank President Axel Weber is even campaigning for an immediate end to the ECB’s bond purchase-program, a push Trichet rejected. The ECB’s buying already differs from other quantitative-easing policies because the central bank mops up the resulting liquidity, meaning the net effect on the money supply is neutral...
The BOJ’s Shirakawa said Oct. 28 that shifting the date of his policy meeting to this week from Nov. 15-16 wasn’t linked to the Fed. Rather, policy makers want to discuss buying ETFs and REITs sooner than originally planned, having already agreed last week to purchase corporate debt with lower credit ratings than they had previously purchased, he said.
A weaker dollar would still risk undermining the world’s second largest economy, with the yen’s surge to a 15-year high already prompting companies such as Toyota Motor Corp. to cut back. Japanese government securities rose on speculation the BOJ could use the meeting to loosen credit further, with the 10-year bond capping seven straight months of gains last week. The central bank will be “ready to take action after markets react to the Fed’s action,” said Takeshi Minami, chief economist at Norinchukin Research Institute Co. in Tokyo.
UPDATE 1: As expected, the US has fired the first salvo with Fed intentions to buy $600 billion more worth of Treasuries to June 2011:
To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to expand its holdings of securities. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.Unsurprising end result? The dollar is taking it on the chin. It's your move next UK, EMU, and Japan as the US clearly aims to weaken its currency.
UPDATE 2: The Bank of England ain't doin' nuthin' in light of recent favourable data. It notes "The Bank of England’s Monetary Policy Committee today voted to maintain the official Bank Rate paid on commercial bank reserves at 0.5%. The Committee also voted to maintain the stock of asset purchases financed by the issuance of central bank reserves at £200 billion."
And turning to the focal point of the article above, the ECB isn't succumbing to American antics, either, simply stating "At today’s meeting the Governing Council of the ECB decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 1.00%, 1.75% and 0.25% respectively."