Last week’s two-day G20 meeting ended up running “true-to-form” – Japan was left alone, again allowing short yen positions to dominate positioning. In fact, the member nations seemed less concerned about currency wars and sovereign debt blowouts and instead wanted to encourage economic growth initiatives. In today’s reality and facing another global slowdown, the tag team of the U.S. and IMF have been pitched against the eurozone and U.K. over whether “axing budgets and debt is the recipe for recovery or recession” – to spend or not to spend?
As was expected, Japan was not signaled out or blamed for overseeing the huge yen depreciation initiated last fall when it became apparent that Abenomics was here to stay. If there are any criticisms of Japan's aggressive monetary policy stance by any fellow members it has been very well hushed up, including the U.S. The global FX market wants so badly to push USD/JPY with conviction through 100 and beyond – IMM future and spot positions all point to one thing, short-yen positioning. Long USD/JPY positions were sometimes tentative and cautious last week ahead of the G20 meet. Investors had been afraid that some pressure would be applied to Prime Minister Abe and his fellow policy makers even if Japan were not “officially” signaled out. In fact the opposite is true – yen has been given “green to go” on down further.
Early this week, the market expects four of Japan's largest Life Companies to unveil their investment plans for the New Year. Now that the G20 has sanctioned Tokyo’s policies, these Life Companies may be confirmed as the strong catalyst for the dollar to break much higher if the "Lifer’s" plan to increase their foreign bond holding for this year. Market chatter seems to confirm that there is a large option barrier being protected at 100 – the same one that was well defended on the last go around earlier this month when the market printed a high 99.95. Current market momentum will eventually test this. The first true technical resistance level hovers just a tad higher at 100.21.
Japan escaped direct criticism from fellow member states for their “domestic reasons” for weakening the yen because the G20 now wants to focus on encouraging global economic growth initiatives. In fact, it was Europe who seemed to have received the bulk of the member’s attention at the two-day meet. It seems we now have the makings of a running battle between the twin themes of “austerity and spending.” The G20 and the IMF are obviously trying to change gears and are becoming more concerned by the global growth picture. Europe and not Japan was probably the G20′s intended victim all along.
The eurozone governments were urged to promote growth and reject hard debt cut targets. Mainland Europe was not the only region signaled out. Last week, the IMF’s primary focus was the U.K. – commenting that Cameron’s government should slow down its pace of austerity measures for the “sake of promoting growth.” In truth, the U.K.’s economic momentum is weakening and the market is beginning to price in further easing by the BoE later in the year. The "dynamic-duo" or the twin economies of the U.S and China go some ways to support the members' concerns – data confirms that the U.S economy has hit a soft patch while China appears to growing at a much slower rate than many had been expecting. It’s no wonder that the G20 turned a blind eye towards Japan – policy makers want to see regional growth turning into a global growth project.
With very little to tempt investors, this morning’s incoming euro data over the next few days has been elevated in importance ahead of next month’s ECB meeting. Especially so after last week's remarks from the IMF’s Lagarde and Germany’s Schauble that the ECB has room to ease monetary policy further. Tomorrow, investors will get flash eurozone PMI data followed by Germany’s own PMI on Wednesday. The market expects a modest weakness from last month’s two readings. However, any surprises to the downside and a refi rate cut will be priced in. How much of an impact would a further -25bp ease have? Is it enough to help the SMEs? The ECB probably needs to be more aggressive – pushing deposit rates into negative territory would certainly have more of a money market impact.