Danske Daily: Who Said Currency War?

G7 communication confusion supports JPY despite no-action statement.

Obama delivers little news in his State of the Union speech.

Big Scandi day today: Riksbank meeting and Norwegian Q4 GDP - also watch out for Bank of England Inflation Report and US retail sales.

Markets Overnight
After days of discussions on whether a global currency war is emerging, yesterday’s G7 statement initially dampened expectations that the group would attempt to counteract recent currency developments. Notably the G7 stated that ‘policies have been and will remain oriented towards meeting our respective domestic objectives’, in our view underlining that the use of e.g. quantitative easing is regarded an internal affair for now. However, later in the day, a G7 official was quoted saying the statement had been misinterpreted, and that it was supposed to hint at excess yen moves.

Still, as we say: There is no such thing as a global currency war, the use of unconventional policies to stimulate struggling economies such as the Japanese when interest rates reach the zero lower bound should not be viewed nor treated as exchange rate manipulation; rather we better get used to the use of these unconventional policy measures as major economies may not see the rate instrument freed up any time soon. We think the G7/G20 majority adhere to this view as well and that this will be signalled after this week’s G20 meeting. But for now communication confusion rules.
Last night, in his annual State of the Union address, US President Obama did not move the market much when putting forth his agenda to ‘reignite’ the US economy including a rise in the minimum wage, initiating new infrastructure spending of USD50bn and negotiating a new trade agreement with the EU. In terms of ongoing budget talks, Obama reiterated his offer to the Republicans to cut spending on Medicare but that tax loopholes and deductions would also have to be scrapped.

Equity markets are generally higher in both the US and Asian sessions with Japan the notable exception: yesterday’s yen gains have been weighing on sentiment among Japanese stocks. US bond yields moved slightly higher with the curve steepening as the long end was sold off the most; 10Y yields up by 3.5bp. In FX markets the rise of JPY on the back of yesterday’s confusion on G7 communication has continued overnight with USD/JPY slipping below the 93.0 level; AUD and NZD have gained as well helped by upbeat consumer confidence in Australia. EUR/USD consolidated its move above 1.3450. New Zealand’s central bank chief Graeme Wheeler has previously hinted that intervention might eventually be a option to curb NZD strength but the country’s finance minister Bill English said that New Zealand would not take the risk of going against market flows. Who said currency war?

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