GO Markets FX Analysis | Yen climbs on G-7 statement; Aussie recovers from 4-month low

Yen climbs on G-7 statement

The Yen bounced across the board overnight following a statement from the G7 nations expressing the importance of market determined exchange rates, rather policy-driven exchange rate targeting. The statement added: “We reaffirm that our fiscal and monetary policies have been and will remain oriented towards meeting our respective domestic objectives using domestic instruments, and that we will not target exchange rates”. Furthermore, the communiqué highlighted the adverse effects of “excessive volatility and disorderly movements in exchange rates.”

On the surface these comments appear to have more of a reassuring tone and the Yen subsequently continued its losing trajectory, nonetheless, wide-spread reports quoting an unidentified official said the G-7 statement had been “misinterpreted” and was more an attempt to highlight excessive moves in the Yen.  The ensuing period saw the Yen pop across the board with the USD-JPY pair falling into the 92-handle before regain composure of the course of trade after UK official refuted the statement was targeted at Japan. At the time of writing the dollar is buying 93.5 Yen.

Indeed, if the statement was designed to take a pot-shot at Japan we may find out from the G-20 correspondence later in the week where the topic of ‘currency wars’ is expected to take centre stage. For now we can only take this statement at face value and interpret the comments as simply a way of reassuring and diffusing wide-spread concerns of a new currency war. Ironically, the statement caused the very same thing it may have been designed to reduce… excess volatility and disorderly exchange rate movements.

Currency wars by proxy

As many of our regular readers are no doubt aware, the term “currency wars” has once again entered the vocabulary of traders word-wide. The term refers to a central bank or government pursuing a weaker currency by means of policy. Inadvertent or not, It’s abundantly clear major economies from the United Sates to Japan are engaging in a currency war by proxy, given their efforts in recent years to rejuvenate respective economies using policy easing tools such as quantitative easing.  While central bank easing programs such as quantitative easing may not be specifically employed to weaken a currency, it’s clear the consequence is something central banks and governments are all too happy to accept.

Right or wrong, efforts to spur economic growth through unconventional (or conventional) means such as quantitative easing are here to stay, and as long as nations such as the United States and the United Kingdom continue to pursue growth through stimulus, there is little that could be done to halt Japan’s efforts to do the same. In other words; Pot, Kettle, Black.

Aussie recovers from 4-month low

The Australian dollar recovered overnight after falling to a 4-month low of 102.26 US cents late yesterday. Support for equity markets both sides of the Atlantic contained selling activity before buying momentum carried price action back above 103-figure. We also note residual US dollar weakness across the board as a result of falls in the USD-JPY rate.  Mid-tier economic data on the local docket today includes Westpac Consumer Confidence and while we anticipate this may encourage small moves one way or the other, it’s unlikely to be trend defining. Instead we continue to look to regional equity market activity for guidance while technical selling around the 200 DMA of 103.09 and again through 103.2/3 US cents may be hard to break without strong offshore leads to guide the way.

 

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