Forex Markets Seen As A Global Competitive Event

|
Includes: FXB, FXE, FXY, UDN, UUP
by: Ralph Shell

There is global unrest among leaders as they assess overt and covert efforts to influence the relationship of currencies. Little notice was paid when Switzerland pegged the franc to the euro, perhaps because there was little international impact. It was different, however, when the Japanese decided to elect a leader who vowed to weaken the yen. After years of deflation and three recessions in five years, this sounded like the perfect elixir.

Prime Minister Abe's plans include persuading the Bank of Japan to increase the money supply, which would be used for capital improvements in Japan, and to invest money overseas in USD and euro bonds. Abe has been successful talking the yen lower, but this has caused alarm in Japan as well as abroad. Domestically, the Japanese are now rightly fearful their food and energy costs will increase.

And overseas, Bloomberg reports:

"The world is on the brink of a fresh 'currency war,'" Russia warned, as European policy makers joined Japan in bemoaning the economic cost of rising exchange rates.

"'Japan is weakening the yen and other countries may follow,' Alexei Ulyukayev, first deputy chairman of Russia's central bank, said at a conference today in Moscow."

The yen's depreciation, combined with the perception the euro crises has been solved, has sent the euro soaring. This has caused Luxembourg Prime Minister Jean-Claude Juncker to complain the euro is "dangerously high." Are the European elites becoming aware now, the "Draghi put," which wards of the bond vigilantes and elevates the euro, hurts the economy?

So far the Americans have not joined in the discussion, but rather responded by example. In a speech, Eric Rosengren, President of the Federal Reserve In Boston, said the Fed has the capacity to buy more than the $85B loans per month. In other words, they have the ability to print even more money should there be a currency war.

Today, we received the Treasury International Report (TIC), which showed a strong inflow of money into the U.S. during November. The net buying of U.S. long-term securities was $52.3B, up from $1B in October. The purchases of U.S. Treasuries was $26.4B, up from $12B in October. China bought $200M of Treasuries, with Japan $900M taking their holding up to $1.17T and $1.13T, respectively.

It is interesting to note that the UK, Germany and France all were buyers of U.S. Treasuries during November. The U.S. may have been viewed as a safe haven from a euro crisis during this period. Continuing into 2013, there may have been a reversal of the currency direction, resulting in (EURUSD, FXE) euro buying and USD selling. Continuing in that vein, there may also be safe haven funds flowing from the pound back to the continent.

The euro has been doing quite well versus the pound, having appreciated from under 78 to the current level of 83. We do have PM Cameron scheduled to make a speech on Friday regarding the future of British participation in the EU. If the EU membership were put to a vote in Britain, how would that vote go? I note my Facebook account is bombarded with stories from an organization opposed to British membership, called Better Off Out.

Markets appear to be moving at the whim of political statements. We would be inclined to be a seller of the EURGBP, but are wary of the content and market reaction to the PM's Friday speech.

Click to enlargeClick to enlarge

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.