The hot topic du jour – if it’s not commodities it could be global yields and the role of your everyday central bankers or maybe it’s Apple (AAPL) stock trading below $400 overnight? Perhaps tech stock is not significant enough. How about the Italian presidential vote or all those annoying whispers that surrounds the G20 meet starting in Washington D.C. today? Will each and every nation reaffirm a commitment to avoid weakening their domestic currencies to gain a trade advantage? Last February's pledge to “move more rapidly towards a more market- determined exchange rate systems and exchange-rate flexibility” will surely not keep USD/JPY from its destined 100-handle print, won't it?
There is nothing more dangerous than an idle and bored trader. Investors are currently in a wait-and-see mode ahead of the two-day meeting of the Group of 20 industrial and developing nations. The market is expecting to see an early leak of the draft communiqué this morning. The specific reference to Japan, Korea and China in the U.S. Treasury’s semi-annual currency report last week has raised expectations amongst a few that a potential change in the statement’s language would not go amiss. It is probably a tad optimistic to believe a change in language is now warranted. Last week’s U.S Treasury’s description was nothing out of the ordinary and in line with February’s G20 statement – at most, investors should expect the communiqué to renew the call against competitive devaluation, and against exchange rate targeting – rather boring really.
Whether we want to admit it or not, a good central banker is treated like royalty – just look at Governor Carney from the Bank of Canada and his highly publicized move to the BoE next month. He is soon to be officially anointed as the potential savior for the U.K. economy. Before leaving his “predictable” position at the BoC, he was able to make a few tweaks to his GDP forecast and inflation. The central bankers' role of focusing on inflation and protecting the value of their currencies is in today’s modern world relatively passé. Governor Carney is now expected to preserve financial stability and engineer economic recovery, something that political leaders have been unable to do.
Governor Carney, attending his penultimate interest rate meeting yesterday, and after keeping overnight rates on hold, said inflation is a non-issue in Canada until Q1 2015. The collapse in gold this week certainly supports the Canadian policy maker's view. Well renowned global hawks are also beginning to take a step back from their convictions. Notorious hawks like the Bundesbank’s Weidmann and the St. Louis Fed President Bullard are now beginning to worry about their own domestic “low-inflation” trend. The official party line is that policy makers are in a position to adjust their policies accordingly. Unofficially, the global monetary race to the bottom is still on – the race to zero rates. The market should expect the major central banks to keep their monetary policy loose or even loosen further.
Today’s typical yield seeker sees the world as “flat” – the race to zero is ongoing. Bundesbank President Jens Weidmann yesterday reminded all confused investors that Europe is still a long ways from escaping further trouble with the region's debt crisis. While reflecting on deteriorating German data of late, he firmly threw the “cat amongst the pigeons” by stating that the ECB may cut interest rates if economic and inflation conditions deserve it. This statement has given the EUR "bear" a new lease of life. However, just like a buyer, sellers beware, recent history indicates that this EUR market will probably not go straight down in any meaningful way.
Yesterday’s sharp EUR decline may require further consolidation before further progression. The lack of a meaningful EUR bounce should keep short-term focus on the downside and favor the dollar. The mighty dollar's worst-case scenario is a tepid U.S economic recovery. Under these conditions it would require the Fed not to begin scaling back its QE program anytime soon. Further yen weakening is inevitable as a result of Governor Kuroda’s aggressive easing program; however, the yen’s decline is not a linear trade or a one-way bet either. Despite all the noise of late, your average investor seeks a sign from today’s G20 to allow them sell more yen.
Sterling, like the 17-member single currency, was already on the back foot before this morning’s sales data release. On the face of it, March’s U.K. retail sales (ex-energy) headline was weaker than expected (-0.8% vs. -0.5%). However, digging deeper, -0.2% of this weakness was due to an upward revision to an already strong print in February (+2.1% vs. +1.9%). The overall Q1 retail sales print is +0.4%, and if the market excluded the English weather impact the headline would still be positive – at the end of the day this report should have little impact on the BoE current outlook. Now the market waits for a G20 sign!