That’s the new black according to Citi’s Steven Englander:
Since May 1 the median increase in 10-year local bond yields in 47 major EM and developed markets (DM) is 39bps (Figure 1). Among major EM economies (light blue) it is 83bps; among major DM (dark blue) economies it is 29bps. The US 10-year Treasury yield increase (red) is only at the median of developed economies and well below the overall median. In both EM and developed economies, the fat tail of rate increases is to the upside, so average increases are even higher. The paradox is that the run-up in US interest rates, which is arguably the primary driver of these global rate increases, is well below the average and median globally.
Bank of Korea has done its bit to stoke the currency wars…
Although they insist that it’s not. From BAML’s Jaewoo Lee:
In the press interview, the Governor cited a few main changes since April which led the BoK to cut in May rather than in April: the supplementary budget was finalized; many central banks, including the ECB, turned to easing mode; and the easing can help further with improving sentiments. The Governor, on the other hand, stated that today’s decision was not a response to the yen weakness, contrary to the often-voiced speculation.
Strong currencies are the bane of every triple-A rated, QE-less economy in currency war-torn 2013, it seems. It’s become an increasingly irksome point in Australia, where the initial exuberance over cheap foreign holidays has been slowly replaced by worries that it’s squeezing the non-mining sectors.
An FOI request by Bloomberg yielded a bunch of documents from the Reserve Bank of Australia about the currency’s overvaluation problem. Specifically, how bad it is and who’s to blame. Well, who among other central banks*, at least. Here’s list of the definitely-implicated: Read more
The currency war meme rumbles on as the G7 does its very best to avoid a coherent message amid arguments about whether drawing a distinction between “domestic objectives” that weaken a currency and just plain weakening it actually matters. Ho hum. Read more
A predictable response to the utter confusion around yesterday’s G7 statement:
You gotta roll with fashion:
We have Weidmann worrying the currency wars are kicking off again with Japan leading the way and a whole host of others either joining in and/ or complaining hypocritically. Read more
There’s basically nothing happening. Sure we’ve got plenty of rhetoric, a Swiss franc floor and QE — but FX volatility is touching recent lows:
Currency wars are back in fashion. Even if you ignore the idea that those who fire the opening shots do so as an after-thought, there is still a feeling this may tip into widespread conflict.
But, the idea of currency wars as a negative may be fundamentally misunderstood (we blame the ‘war’ branding thing). Read more
Japan’s finance minister Jun Azumi was pretty clear about how the country might respond after the FOMC’s decision last week threatened to push the yen higher against the dollar. Today the BoJ made good on the threat, announcing it would increase its asset-purchasing programme to ¥80 trillion ($1.01tn) from ¥70tn.
The yen did this: Read more
QE3 has set the dogs of FX verbal intervention loose (well, looser anyway) and it seems probable some actual shots may be fired in the coming while.
Bank of New York Mellon’s alliterative Neil Mellor pointed to Brazil, where the central bank was the first to pass comment on the Fed’s move (with our emphasis): Read more
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 Senate is set to vote next week on legislation to punish China for manipulating its currency, as the renewed threat of global recession raises tension over exchange rates, reports the FT. Harry Reid, Democratic leader of the Senate, said this week he would invoke “cloture” – a procedure to prevent delay – for senators to vote on a bill that would require the US to use estimates of currency undervaluation when calculating anti-subsidy import tariffs. The bill is subject to amendment, meaning that it could end up with so many additions it becomes in effect impossible to move forward, but experts in trade policy said it had a good chance of passing.
Crossing the Reuters tape a little while ago, it seems members of the G20 have learned to play nice(r) since their last meeting in November:
G20 CONSENSUS REACHED ON CAPITAL CONTROLS AND EXPANSION OF IMF CURRENCY BASKET FOR SPECIAL DRAWING RIGHTS Read more
One by one, the countries of the emerging world are loosening the shackles with which they tried to prevent their currencies from appreciating, the FT writes. It is not that they care less about export competitiveness than they did even a few weeks ago. It’s that they now care more, much more, about inflation. And with rising prices of commodities, especially food and oil, stoking inflation, officials are deciding that allowing a currency to appreciate is a good way to relieve the pressure. The latest to move is Chile, which late on Tuesday raised interest rates by 0.5 percentage points for the second month running, and signalled that they could go higher – above the current 4.25 per cent – in coming months. Since the move had been expected, the Chilean peso rose only marginally on Wednesday against the US dollar, but at 472.80 it now stands 3 per cent higher than a month ago and 5.5 per cent higher than on January 1. Earlier in the week, the South Korean authorities confirmed that they too were betting on currency appreciation to stem rising inflation (4.7 per cent in March). The central bank left interest rates unchanged, but did so only after the government eased up on earlier efforts to limit the won’s rise. The South Korean currency is now at 1,085 to the US dollar, 4.5 per cent higher in a month. Last week, in the biggest surprise of all, Brazil retreated in its gruelling fight to limit the real’s appreciation. The authorities did nothing to prevent traders pushing the currency through the psychologically important R$1.60 to the dollar level, and the real now stands at R$1.58, about 6.5 per cent higher than in mid-March.
Brazil has stepped up its “currency war”, a day after the International Monetary Fund tacitly endorsed the use of capital controls, with the announcement of the fourth set of measures within a month to help control its exchange rate, the FT reports. Guido Mantega, the finance minister, said the government would extend a 6 per cent tax on repatriated foreign borrowings to loans or bonds with a maturity of up to 720 days, compared with the previous limit of up to 360 days. “The government has to take action to avoid any type of excesses,” said Mr Mantega. The IMF proposed its first guidelines this week on the use of measures to control inflows of speculative capital, in a move seen as legitimising a tool it had once staunchly opposed. Brazil has been fighting to keep its currency, the real, trading at about 1.65 to the US dollar – a level that is almost 40 per cent higher than two years ago. But in recent weeks, the currency has strengthened further.
Brazil’s central bank raised interest rates by 50 basis points in the second such move this year as it seeks to curb rising inflation, the FT reports. New central bank head Alexandre Tombini boosted the benchmark Selic rate to 11.75 per cent on Wednesday night as he seeks to balance rising inflation against a strong currency. “The Copom (monetary policy committee), decided unanimously to raise the Selic rate,” the central bank said, without elaborating. Brazil’s economy is expected to have grown about 7.5 per cent in 2010 and is on track for further expansion this year on the back of rising consumer credit and investment. The government is expected to release fourth-quarter gross domestic data on Thursday. The rapid growth has also rekindled inflation and attracted foreign investment inflows that have strengthened the Brazil’s currency, the real. At 6.08 per cent in the 12 months to mid-February, inflation is above the central bank’s target of 4.5 per cent, plus or minus 2 per cent.
The US is pushing Brazil to form a united front against China’s allegedly undervalued currency, as Latin America’s largest economy struggles with a flood of cheap Chinese goods and a surging Brazilian real, reports the FT. Tim Geithner, US Treasury secretary, visited Brazil on Monday to prepare for a G20 meeting later this month and a planned visit by Barack Obama, US president, expected in March. In a clear reference to China, Geithner was set to say in a speech that capital inflows to Brazil have been magnified by attempts by other emerging economies to sustain undervalued currencies with tightly controlled exchange rate regimes. Any alignment with the US on the issue of China’s currency would mark a fundamental shift for Brazil, which has pursued a trade policy angled towards a grand “south-south” alliance among developing countries. The Telegraph notes Geithner’s visit comes as the US Treasury steps up calls for China to allow its currency to strengthen, while the WSJ says Brazilian officials privately say that Brazil and the US “may speak with a common voice” on the currency issue at the G20 meeting.
The US is attempting to enlist Brazil in a united front against China’s allegedly undervalued currency, as Latin America’s largest economy struggles with a flood of cheap Chinese goods and a surging Brazilian real, reports the FT. Tim Geithner, US Treasury secretary, visited São Paulo and Brasília on Monday to lay the groundwork for the move ahead of a meeting of the Group of 20 nations this month and a planned visit by Barack Obama, US president, to Brazil, which is expected in March. “Brazil is seeing a surge in capital inflows,” Mr Geithner said in prepared remarks for a speech at a São Paulo business school. “These flows have been magnified by the policies of other emerging economies that are trying to sustain undervalued currencies with tightly controlled exchange rate regimes.”
America, an apology: perhaps we were too quick to worry about the 47 per cent of you that believe China is the world’s foremost economic power.
They may have read this cogent post from Peterson’s Arvind Subramanian, which crunches updated purchasing power parity (PPP) estimates and finds: Read more
China needs to reduce unfair subsidies and stop the theft of intellectual property as well as letting its currency appreciate, Tim Geithner, US Treasury secretary, said on Wednesday. In a speech ahead of next week’s visit to Washington by Hu Jintao, Chinese president, Mr Geithner widened the range of US concerns with Beijing’s economic policy well beyond the currency that has been a focus of Capitol Hill’s anger, and said the economic future of the US was in its own hands, reports the FT. China needed to promote fair competition with the US and other trade partners by reducing implicit subsidies from low-cost finance, land and energy, and clamp down harder on the theft of intellectual property from foreign companies.
Brazil has warned that the world is on course for a full-blown “trade war” as it stepped up its rhetoric against exchange rate manipulation, the FT says. Brazil’s finance minister told the FT that the country was preparing new measures to prevent further appreciation of its currency, the real, and would raise the issue of exchange-rate manipulation at the WTO and other global bodies. He said the US and China were among the worst offenders. Meanwhile, MarketWatch reports that China’s trade surplus was 40% smaller than expected in December — potentially easing some China-US trade tensions ahead of a state visit by Hu Jintao later this month.
Brazil has launched a fresh push to curb its rising currency, amid renewed efforts by fast-growing economies to restrict damaging inflows of “hot money”, reports the FT. In a move against speculative trading, the central bank announced higher reserve requirements for domestic banks against their FX positions. The decision follows Chile’s move this week to intervene to curb the peso. The Brazilian real, which has gained about 13% against the dollar since May, slid on the news, falling 0.8% in New York on Thursday to R$1.68. In a separate report, the FT says other emerging economies could follow Brazil and Chile’s example.
A report Wednesday morning from Reuters, which spots an article in a Chinese-language newspaper:
China will let the yuan rise about 5 percent against the dollar in 2011 to combat inflation, an official newspaper said on Wednesday, while a former central bank adviser said the country needs to free up the currency. … Read more
This is ironic, Brazil.
That’s a Nomura chart showing the Brazilian government as the biggest ‘loser’ of the currency war. You know the war we’re talking about: Brazil was the first and loudest to declare it in 2010. Oops. Read more
Chile was set to become the latest country to join the “global currency wars” after the central bank said on Tuesday it would spend up to $12bn this year to curb the peso’s strength and help exporters from one of Latin America’s most open economies, the FT reports. The move, announced late on Monday after the peso approached a near three-year high against the dollar, surprised markets as Chile’s central bank is known for its hands-off approach to its free-floating exchange rate. As the FT’s MoneySupply notes, Chile’s finance minister argues that the Fed’s quantitative easing programme has put upward pressure on the peso.
Unbalanced, and thus blisteringly honest.
Fred Goodwin, “Mr Macro” strategist at Nomura, unplugged: Read more
The People’s Bank of China sure knows how to gatecrash a party.
In an uncanny coincidence, the PBOC lifted bank reserve requirements 50bps – widely seen as a step against QE-inspired capital flows – just as Fed chairman Ben Bernanke rose to speak at the European Central Bank on, erm, the merits of QE. Read more
The latest moves by South Korea and China — not to mention India, Malaysia, Thailand and a swag of other countries — to impose capital or price controls show that the hype over ‘currency wars’ is mutating into a low-intensity battle being waged by countries through a series of unilateral, ‘micro-management’ measures.
In the same week that China announced it would impose price controls to curb inflation comes news that South Korea will reimpose a 14 per cent withholding tax on foreign investors’ earnings from government bonds. Read more
Q: What is 41 years old, worth $300bn and often neglected? A: The bridesmaid of foreign exchange: Special Drawing Rights (SDRs).
SDRs are the IMF’s international reserve assets, which act as potential claims on the freely usable currencies of its members. (For example, you may see them as part of an Irish loan package.) Read more