Group of 20 finance chiefs sharpened their stance against governments trying to influence exchange rates as they sought to tame speculation of a global currency war without singling out Japan for criticism. Two days of talks between G-20 finance ministers and central bankers ended in Moscow yesterday with a pledge not to "target our exchange rates for competitive purposes," according to a statement. That's stronger than their position three months ago and leaves Japanese officials under pressure to stop publicly giving guidance on their currency's value. With the yen near its lowest level against the dollar since 2010, policy makers are attempting to soothe concern that some countries are trying to weaken exchange rates to spur growth through exports. The risk is a 1930s-style spiral of devaluations and protectionism if other countries retaliate to safeguard their own economies.
Although it was the main focus of their recent meeting, and their stance is characterized as "tough," there wasn't any action taken. They didn't suggest penalizing Japan for their recent devaluation, nor did they suggest penalties against other countries that might follow suit. While they openly say that it's not the right thing to do, by omitting any penalty they are giving central banks the green light to pursue this policy.
And because of this, the Yen got even weaker after the news:
"There's renewed selling pressure on the yen and it's a reaction to the G-20 statement," said Adam Myers, head of foreign-exchange strategy at Credit Agricole Corporate and Investment Bank in London. "Everyone has woken up to the realization that the G-20 couldn't criticize Japan when many other countries are manipulating their own currency."
Then today, ECB president Mario Draghi said that public leaders shouldn't even discuss the topic, and the currency wars were an overblown phenomenon, that recent Forex movement was mostly due to global macro factors, not central bank intervention:
I find really excessive any language referring to currency wars," he said. "I urge all parties to exercise very, very strong verbal discipline. I think the less we talk about this the better."
"Looking at the nominal and real exchange rate of the euro, we see that by and large, it is around its long-term average."
Earlier on Monday, Ewald Nowotny, another ECB policymaker, said that recent currency movements were not reason to cause alarm.
"There is a euro appreciation against the yen but not to a dramatic extent," he told reporters.
Reinforcement of trading strategy
Last week we suggested a strategy to capitalize on the currency wars going long XAU/JPY. The comments of the G20 reinforce this strategy - they are sending the markets the message they will allow the currency wars to continue. The G20 is really the only group that could put an end to such a practice. It also confirms the continuation of a likely Yen decline. The next key date determining the fate of the Japanese Yen (FXY) is March 19th when a new BOJ governor will be selected:
The main focus for the yen now is on who will be appointed to replace BOJ Governor Masaaki Shirakawa, who will step down on March 19, Morgan Stanley analysts led by Hans Redeker in London wrote in the note to clients published Feb. 16. Abe is likely to nominate Asian Development Bank President Haruhiko Kuroda, who is set to pursue the government's anti-deflation course, though if he nominates former BOJ deputy governor Toshiro Muto, that may trigger the yen to retrace losses back to 90 per dollar, Morgan Stanley said.
Traders who are in the Yen trade should watch this date as it could cause the Yen decline to continue, or possibly peak and reverse if Muto is selected.
The US Federal Reserve announced QE4 before the new year, which wasn't really big news at the time considering the Fed had already signaled they would print an unlimited amount of US Dollars and keep interest rates steady until at least 2014. Since then, the USD has been down against most currencies, with the most notable exception being the Japanese Yen.
The importance of this meeting - it solidifies the fundamental view of any strategy that is short currencies that are being debased. In the case of the Yen strategy outlined, it signals a further Yen decline. The same can be said for the US Dollar, with the exception of the USD/JPY pair (Yen going down faster than dollar).
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.