We thought the following from TD Securities’ Richard Gilhooly on Tuesday was a rather insightful way of looking at the whole BoJ effect (our emphasis):
While it remains a contentious point and as yet unproven, Japan’s devaluation and soaring Nikkei vs slumping DAX or Bovespa has all the hallmarks of a competitive devaluation. While competing factions debate the Monetary expansion/QQE, versus beggar-thy-neighbour interpretation, one positive aspect of the Japanese Yen collapse and fear of exported deflation has been collapsing commodity prices with weak growth in export countries (China, Germany, S Korea) and a stronger USD helping a supply story (crude inventories at 22yr highs) and weak demand send commodities into a bear market.
Here’s a chart from Nomura:
Belarus has finally unified the two remaining segments of the FX market, after months of dragging its feet. In other words, the Belarusian rouble is now “properly devalued” to quote Nomura analyst Tatiana Orlova.
On Thursday, Belarus’ central bank facilitated a full market free float that set a single exchange rate of 8,680 to the dollar — 52 per cent weaker than Wednesday’s official rate. About time too. Read more
A bill that aims to punish Beijing for holding down its currency passed the Senate on Tuesday despite a warning from China that the legislation could plunge the global economy into a 1930s-like depression, the FT reports. The legislation passed the Democrat-led Senate with a comfortable 63-35 majority, with several Republican senators also supporting the bill. The vote could set up a tussle with the House of Representatives, whose Republican leaders have called the bill “dangerous” and so far have refused to schedule a vote on it. China stepped up its criticism of the bill, with foreign ministry spokesman Ma Zhaoxu said in a statement warning the move “seriously violates rules of the World Trade Organisation and obstructs China-US trade ties”, Xinhua reports.
The chairman of the US Federal Reserve has accused China of damaging prospects for a global economic recovery through its deliberate intervention in the currency market to hold down the value of the renminbi, the FT reports. Speaking just hours after the Chinese government sharply criticised a US congressional bill that would punish Beijing for alleged currency manipulation, Ben Bernanke told a congressional committee that an undervalued renminbi was preventing the rebalancing of global demand towards emerging market economies. The US Senate voted overwhelmingly on Monday to open debate on a bill, clearly aimed at China, that would impose tariffs on imports from countries with undervalued currencies. However on Tuesday, John Boehner, Republican Speaker of the House of Representatives, counselled caution over the bill, saying it went beyond the remit of Congress.
China’s foreign ministry said it “adamantly opposes” a bill being pushed by the Senate to allow the United States to impose duties on countries that undervalue their currencies, Reuters reports. In a statement posted on China’s official government website on Tuesday, foreign ministry spokesman Ma Zhaoxu warned the United States not to “politicise” currency issues, and said the US was using currency as an excuse to adopt protectionist trade measures that violated global trading rules. “By using the excuse of a so-called ‘currency imbalance’, this will escalate the exchange rate issue, adopting a protectionist measure that gravely violates WTO rules and seriously upsets Sino-US trade and economic relations,” he said. “China expresses its adamant opposition to this.”
The US Congress is renewing a push to penalise China over its currency, the FT says, potentially forcing the White House to choose between angering its Democratic base and upsetting its delicately balanced relations with Beijing. The Senate is expected to vote on anti-China trade legislation on Monday, with the bill likely to pass with overwhelming bipartisan support, before being sent to the House of Representatives. The White House has given mixed signals on the subject. The bill would require the commerce department to use estimates of currency undervaluation when calculating so-called countervailing duties, imposed against imports deemed to be state-subsidised. Although the legislation has been drawn more tightly than previous such bills, which simply proposed levying an across-the-board tariff on Chinese imports, many trade lawyers think it would still be vulnerable to legal challenge at the World Trade Organisation.
Scandinavian currencies have taken over the Swiss franc’s mantle of haven currencies of choice following the Swiss National Bank’s decision to attempt to put a ceiling on the value of the franc, the FT says. Since the SNB announced its move on Tuesday, the Norwegian krone has climbed more than 2.5 per cent to hit an eight-and-a-half-year high of NKr7.4825 against the euro, while the Swedish krona has gained 2 per cent to a three-month peak of SKr8.9420. Scandinavian currency bulls have been reassured by the reaction of central banks in Norway and Sweden. The former dismissed speculation that it would follow Zurich’s lead and intervene to weaken its currency, while Sweden’s central bank surprised investors by indicating that interest rates in the country were likely to rise by the end of the year.
The IMF says a substantial appreciation of the Chinese renminbi would have little effect on trade and growth in the rest of the world even if accompanied by other economic liberalisation, the FT reports. In its annual report on the Chinese economy, the IMF said a 20 per cent trade-weighted appreciation in the renminbi – a level similar to that demanded by many American lawmakers – would increase growth in the US economy by between 0.05 and 0.07 percentage points. However the report says the currency is substantially undervalued – a view rejected by China’s representative to the IMF, says the WSJ. The IMF also signalled concern about the Chinese property market, Reuters says, although it expects inflation to ease in the next few months.
An eye-catching headline from UBS.
On Wednesday, economist Stephane Deo explains how Greece could use a sort of proxy for currency devaluation — the erm, traditional answer to debt overloads — to help haul its way out of crisis. Read more
Perhaps there’s been a drachma-tisation of a devaluation’s worth.
A major point of leaving the monetary union, one would presume, would be for Greece to extricate itself from the single currency and switch to the new drachma, or similar. Talk of Greece leaving the eurozone has of course started up again after a Spiegel report last Friday. More importantly, it’s become more nuanced. Kenneth Rogoff is quoted in a Thursday Reuters story saying Greece should “take a sabbatical from the euro zone, do a massive currency devaluation and then re-enter at a later date.” Read more
It’s no secret we at FT Alphaville ♥ John Kemp.
And we output gaps. Or at least, certain policymakers’ over-reliance on them. Read more
Many analysts are advising clients to buy battered banking stocks.
But none of them are doing it in quite the style of Arturo de Frias, head of banks research at Evolution Securities, who is taking a very big picture, top-down approach: Read more
Matt King — the god of credit strategy at Citigroup — has a block-buster note out on debt — tackling everything from balance sheet recessions to bubbles and busts.
Let’s start with the basics; what does Matt King reckon debt has to do with current market uncertainty? As it turns out — a lot. King thinks leverage in the system is still running high — which means markets are more sensitive to asset price changes. Read more
First, it was Robert Zoellick.
And now former Federal Reserve chairman Alan Greenspan is at it. Read more
An “international currency war” has broken out, according to Guido Mantega, Brazil’s finance minister, as governments around the globe compete to lower their exchange rates to boost competitiveness, the FT reports. Mr Mantega’s comments in São Paulo on Monday follow a series of recent interventions by central banks, in Japan, South Korea and Taiwan in an effort to make their currencies cheaper. China, an export powerhouse, has continued to suppress the value of the renminbi, in spite of pressure from the US to allow it to rise, while officials from countries ranging from Singapore to Colombia have issued warnings over the strength of their currencies.
Schwing! As they might be saying at European Central Bank HQ:
Some further thoughts on the topic du jour — competitive currency devaluation and the race to the bottom.
In the wake of Tuesday’s FOMC statement, RBS FX analyst Gregg Gibbs reckons the chance of a major meltdown on the currency markets is increasing as investors seek the relative safety of higher growth regions — or ones that are not dropping notes from helicopters: Read more
Vietnam must have hoped that Tuesday’s devaluation of the dong would stem the downward pressure on the currency, but on Wednesday it was trading even lower on the black market suggesting the possibility of further devaluations, the FT reports. The central bank moved to devalue the dong by two per cent to 18,932 against the US dollar in a bid to stem the country’s ballooning trade deficit. On Wednesday, however, the dong traded even lower in the black market, falling to 19,480 from 19,320 the previous day. Earlier this week, a gap opened between the commercial bank rate of 19,100 to the dollar and the black market rate, which hit 19,260 on Tuesday. The central bank hoped the devaluation would close the gap, but instead the black market rate continued to fall.
Ah, Yuan revaluation worriers: name-calling won’t win the argument for you. But sage advice from a certain investment bank just might.
Monday brought the sound and fury of a letter from 130 U.S. Representatives to the Treasury demanding that it brand China as a ‘currency manipulator’. Read more
Still uncertain as to the relevance of all the fuss over tottering Eastern European, South American or Asian economies? Uncertainty begone. Says JP Morgan’s Joyce Chang, via Felix Salmon:
QED: The EM corporate loan market is now five times the size of the corporate bond market. Read more
The conventional wisdom is that Latvia, like all countries with pegged exchange rates, cannot devalue. If it did, the cost of its foreign currency borrowings would rocket; private borrowers would go bankrupt. Yet Latvia clearly also cannot continue as is. The central bank is burning rapidly though reserves to defend the euro peg. Meanwhile, the economy is shrinking at a 20 per cent rate. Democracies, it is said, cannot tolerate such deflation – although Argentina’s economy shrank by 67 per cent before abandoning its peg.
There may, however, be a way out of the impasse. Latvian consumers have borrowed about €17bn in euros, equivalent to 90 per cent of gross domestic product. Assume this was switched into Lats, as research boutique Gavekal notes is allowed under law. Then say the Lat devalued by 40 per cent. Swedish banks, Latvia’s biggest lenders, would suffer an immediate loss of €7bn. On the other hand, they could lose as much if there was no devaluation. Bad loans usually reach 35 per cent of total loans in emerging markets crises, Citigroup estimates. The Latvian government could also compensate the banks with bonds worth, say, half the loss. As Latvian public debt is only 20 per cent of GDP, Riga could afford this. The European Union could help with bond guarantees. Read more