Yen Rebounded As G7 Officials Clarify Statement

Markets were clearly confused by G7's messages regarding Japanese yen. Yen initially dipped yesterday as the official statement released from G7 seemed to be general without targeting recent depreciation in the Japanese currency. However, some unnamed officials came out and "clarified" that the statements were indeed targeting yen and the comments sent it higher. The statement pledged that G7 policies "will remain oriented towards meeting our respective domestic objectives using domestic instruments, and that we will not target exchange rates." An unnamed US official was quoted later in the day saying the statement was "misinterpreted" and has indeed "signaled concern about excess moves in the yen". The official warned that ":the G7 is concerned about unilateral guidance on the yen" and "Japan will be in the spotlight at the G20 in Moscow this weekend." Then it's reported that a Canadian official said then statement was aimed at calming recent rhetoric on yen and criticized that Japan has been too vocal on the need for a weaker currency. USD/JPY is back at around 93 level after jumping to as high as 94.45 yesterday. Meanwhile, EUR/JPY and GBP/JPY are stuck in recent range below 127.70 and 117.97 respectively. The meeting of G20 finance ministers in Moscow this Friday and Saturday will now be important in the near term trend in yen. It's expected that emerging market countries would be critical of Japan's recent rhetorics and policies in the G20 meeting.

In Europe, ECB President said that the talk and fear of a currency war "are way, way overdone" and warned that comments on Euro's exchange way will "increase the confusion around the exchange rate and frankly, we don't need that." He emphasized that comments from people whose mandate "is not immediately related to monetary policy" are "inappropriate or fruitless." And, these comments are "inappropriate" if they are meant to instruct the ECB. Draghi then noted that "both the nominal and real foreign exchange rates are about or at their long-term averages," and "what we want to assess now is whether the appreciation, if sustained, has the potential to change our risk assessment for price stability." Meanwhile, regarding the yet to be activated Outright Monetary Transactions, Draghi said "the ECB can only consider OMTs if there are major problems in the transmission of monetary policy and if there is strict and effective conditionality attached to an appropriate European Stability Mechanism (ESM) program."

In US, Philadelphia Fed Plosser commented on Fed's pledged on keep rates near zero until unemployment drops to 6.% and as long as inflation doesn't threaten to rise above 2.5%. He said that while FOMC gave such indication, it is "silent on how policy will actually be conducted". And he complained that "this vagueness runs counter to the theory that supports the use of this explicit form of forward guidance in the first place." And he'd "prefer that monetary policymakers be more transparent and adopt a systematic policy rule as a guide to policy." Jeffrey M. Lacker, president of the Federal Reserve Bank of Richmond said that "a sense of urgency is appropriate" in addressing weak economy. And, a "more measured response by the Fed in August 2007 could have resulted in significantly less instability in 2008."

On the data front, the Aussie was lifted mildly as Westpac consumer confidence rose 7.7% in February. From Japan, domestic CGPI dropped -0.2% yoy in January while tertiary industry index rose 1.4% mom in December. Swiss PPI and Eurozone industrial production will be the released in European session. But the main focus in on BoE quarterly inflation report. Markets are speculating that the BoE would revise down growth forecast. Retail sales, business inventories and import price index will be released from US today.