Needed: Policy-maker Viagra

Thursday, October 01, 2009

Q4 has started off with one of the more ridiculously-timed statements to hit the newswires in recent memory. Joaquin "No, I'm not the Arsenal 'keeper" Almunia, European Commissioner for Economic and Monetary Affairs, was plastered all over the tape this morning stating how the Eurogroup will discuss the rise of the euro and how they'll be sure and bring it up at the next G7 finance ministers' meeting.

The comment was farcical for two reasons. First, the G7 has absolutely nothing to do with the level of the euro and have demonstrated world-class impotence over the issue of exchange rates for more than five years now. If ever there was a body in need of policy-making Viagra, it's the G7. The prime movers behind the rally in the euro, and its lofty trade-weighted levels, is of course the FX reserve managers, many of whom represent countries that are in the G-20. Sadly for Sr. Almunia, that body rarely if ever meets. Oh, hang on a second....

The impotence of the "first world" to drive their own exchange rate policies was amply demonstrated yesterday, when the SNB came in hard, intervening in USD/CHF. While this action did have a short-term impact, it didn't take long before Voldy was on the old dog and bone, hoovering euros and undoing much of the SNB's work.

Meanwhile, this morning also saw intervention in Korea and especially Taiwan, as well as exporter-led sell-offs in the Kospi and Nikkei. No doubt the proceeds of these activities will soon be partially recycled into euros, thereby undermining the moaning that JCT is doing as Macro Man types this.

One wonders if policymakers will ever grow sufficient backbone to call "BS" on the fun and games that are perpetrated with wearying regularity in the currency market. While Western economies are certainly culpable for a lot of the ills that have beset the global economy over the past couple of years, it does seem a bit rich that the BRICS and their chums whinge about the present global exchange rate system without lifting a finger to make things better.

It'll never happen, of course, but 'twould be deeply satisfying if Geithner, Almunia, or A.N. Other would stand up to the BRICs and say "shut your piehole until you can bring a convertible currency to the table."

For now, unfortunately, it seems as if the wagons are being circled and the trend of beggar-thy-neighbour is picking up steam. Whether that deflates the risk-asset orgy is up for debate...but it surely can't help.

Posted by Macro Man at 11:01 AM  

35 comments:

Wonderful dissection on global FX markets MM. To add to all this, did you (and your readers) catch the newly incoming Finance minister in Japan's comments on a strong, no weak, no strong, no (...) JPY ... (sigh), which was it again :) ?

Claus

CV said...
11:49 AM  

We're getting there - competitive devaluations, loss of export income for all except China.... Copenhagen could become an outlet for a lot of things that have been boiling over. This RMB bond issue in HK is a lift (pa only sadly): either China starts to revalue or we're well on our way to a trade war.

Nemo Incognito said...
12:25 PM  

We will do that as soon as we back that up with sth preventing repeat of that ´97 trick. So. First you surrender that substance. Then we be flippin` our chips on the table. Until such time we be quite happy flippin` your index; carry be on / carry be off; with our »pants on«.

Anonymous said...
12:28 PM  

Completely agree Nemo,

Korea, Taiwan and other mercantilist exporters will keep fighting appreciation while the RMB is stable. China is grabbing export market share (for now).

My sense from talking to the PBOC and MOF in June was that their no.1 concern is still external demand and the manufacturing base, even though FAI was recovering.

What is your take on the politics up there? Is the power base of the leadership weak? Does it matter?

Skippy said...
12:58 PM  

Global imbalances are simply unsustainable.It isn't even a subject for argument anymore.You just can't have the high consumption western economies most indebted still carrying the growth expectations of places like China,India and Far East in general.The numbers don't work anymore for the reason cited below.

So when you get that point the only argument is how does it get redressed. Agreements on currencies being free to float and reflective of economics of each country,or do you do it without agreements through trade protectionism.

Anyone looking at the insipid job growth in the last decade and a half in the West need look no further than the growth line of the above mentioned countries which was fine when the debts of people actually employed in mature economies were still at a level that could be serviced. Now we're just no longer in that position. We have to pay down debt levels and we can only do that by being employed and capable of deriving enough income to do it.So something has to change going forward.

Anonymous said...
12:59 PM  

As for China, if I were the US, I'd wait until the dominoes collapse (in regards to the equity/asset markets) and watch the USD soar back into the clouds on risk aversion. At that time, I'd pick the fight with China, hoping to get them to dump their USDs then. Who'd be in the crapper then?

Anonymous said...
1:39 PM  

If they don't want our paper, we'll send them our bullets.

Anonymous said...
2:21 PM  

And they'll send them right back.

Anonymous said...
2:27 PM  

MM, I understand your main point about potshots from the peanut gallery. But the Real is convertible, and aside from a temporary guarantee of loans made in dollars, the Brazilian Central Bank does not seem to manipulate the currency. I take it that Voldemort is your main target here, along with Rublezoni Putinesca, yes?

Bruce Chadwick said...
2:46 PM  

The real is actually NOT convertible on capital account transactions, a legacy of the late 90's currency crisis in Brazil. While Bacen does indeed pursue a reserve accumulation strategy, at least they provide minimal disruption in other countries' markets, unlike China and Russia.

Macro Man said...
2:52 PM  

at least they provide minimal disruption in other countries' markets, unlike China and Russia.


Is that because they haven't reached the levels of China or Russia?

be reasonable people, the very crap that's being spouted to the west is at the very least only half the bs spouted during the asian financial crisis - agree with one of obama's recent speeches - it's time perhaps to "take responsibility"?

running for cover from the extremists in blogspace...

Judy said...
3:05 PM  

It's hard to see how any country couldn't have a "bugger thy neighbor" policy when it comes to currencies. That's one thing the dollar bears seem to miss: It's a big world, and it's ugly everywhere. No one wants a strong currency.

German labor hasn't had a real wage increase in 10 years, how is 1.45 working out for them? How is Watanabe doing at 89?

Most players in the market seem to think the US can manipulate its currency downwards, but as you suggest MM, that may not be possible. Japan tried like hell to weaken the yen in the '90s, and they got 80.

The biggest position I have at the moment is short EUR. So far not much of a payout but it gets interesting below 1.45.

Steve said...
3:28 PM  

I am with Steve on the global ugliness issue and the inevitability of beggar thy neighbor policies on currencies. Most dollar bears are myopic and can see only as far as their own navel.

Spain is in depression, so it's not surprising that Sr. Almunia needs to talk about the Strength of the Euro. The same is true for the other PIGS. This is going to be a serious challenge to monetary union.

Gordo of course was able to devalue sterling and weasel out of the depression. Not that it will get him re-elected....

leftback said...
3:39 PM  

I wouldn't be quite so hard on the dollar bear view. Sure, the "ooh, the US has printed a pile of money, shag the dollar" viewpoint is not particularly sensisble. But there's another dollar bear case...namely, that Voldy, et al continue to buy USD/Asia, etc, and continue to plow a fair amount of those dollars into EUR, AUD, etc. In that sense, it's almost axiomatic that beggar-thy-neighbour leaves USD/G10 lower...

Macro Man said...
3:41 PM  

Issue is that if Voldy starts to revalue $/Asia will appreciate in a big way, basically the RMB will take up its share of the pain of $ weakness. We'll see. The political tolerance appears to be wearing thin here, no doubt the Japanese are pretty pissed. I know the DPJ aren't one with the keiretsu and industrial interest groups but a few brown paper bags and karaoke nights will forge those institutional bonds pretty quickly.

Nemo Incognito said...
3:45 PM  

I wonder though MM, does China change the weighting of its surplus investments, ie, if it nets $50 bio in sales in the US and EUR 10 bio in Europe, would it keep that ratio constant? (Undoubtedly not, but I have no idea how far they stray).

Here's another plus on the dollar ledger: The Europeans are sitting on tons of US turds that they have generally swapped into EUR. When those turds come to roost, they'll get 50 cents on their assets, but they'll be on the hook for a whole buck to make good on their currency swap. They gotta go buy fifty cents.

Steve said...
3:50 PM  

Agree with Steve, the extent of dollar denominated debt can be a major factor in driving the greenback higher. If deleveraging begins again, there will be a big demand for dollars that would be amplified as the carry trade unwinds. Voldemort is stuck between a rock and a hard place, anyway, we all know that.

Anonymous said...
4:10 PM  

Yeesh, the Nikkei seems to have fallen through a trap door. Could it be that "risk off" has finally arrived with the end of FY09 in the US?

Nemo, thanks for recommending that Victor Shih blog. I'm reading his recent book "Factions and Finance in China." Clearly this field of study is the new Kremlinology.

Crisis Management said...
4:34 PM  

I think this quarter could be a party for the risk asset bears. All the old favourites, short S+P, long Bonds, Long Dollar and short commods.

I'm still a believer in inflation hitting us at some point in the future, but I think this deflationary swing will have to play out first and it could be a doozy.

Come on macro guys, I reckon this could be the quarter. Not only will you guys be intellectually and fundamentally correct but risk assets will be going down. Isn't that a macro dream! You get to be right and laugh at those dumb equity suckers!

Of course I could be wrong but that's how I'm seeing it right now.

Anonymous said...
4:48 PM  

Amen Anon, hopefully today is a start.

Steve said...
4:53 PM  

Any thoughts from the board on possible policy response if we are in for another bout of deleveraging?
RJ

Anonymous said...
5:19 PM  

"Landesbank Baden-Wuerttemberg, Germany’s biggest state-owned lender, said it will shed about 2,500 jobs by 2013 and reduce assets as the bank predicts a “substantial loss” this year"

German banks are quite big holders of turds.

leftback said...
5:42 PM  

How come no one wants to believe that low rates lead to higher asset prices? Finance 101 says the lower the discount rate the higher NPV or maybe I am just dumb, which is a distinct possibility.

Anonymous said...
5:50 PM  

"How come no one wants to believe that low rates lead to higher asset prices?"

Japan has low rates. Look at the Nikkei charts. Now, do you want to engage your brain, just a tiny bit?

leftback said...
5:53 PM  

I am guessing the Anon at 5:50 has access to a university grade library system. Here's a hint: don't enrol in Econ 3033: Advanced Methods in Kernel Regression, read some history. It took me 3 years working to realize that.

Nemo Incognito said...
6:05 PM  

Crisis Management, thanks. Problem is that all these guys engage in some fairly heavy self-censorship in order to keep access up. I'll be posting up some good Chinese language sources soon-ish, google translate isn't totally hopeless.

Nemo Incognito said...
6:06 PM  

Nemo, yes, this seems to always be the case with these opaquely managed countries. It's doubly odd because you know the leadership is up to something, just not always precisely what.

Like that CCP guy randomly blurting out their gold strategy, or possibly running copper up from 2.7 to 2.8 this week for no obvious reason. In a way it's a speculator's dream, just wait for them to drive a market and try to ride the wave.

Crisis Management said...
6:45 PM  

Reminds me of Kovner's comments on the USSR in Market Wizards. Funny that we've come full circle.

Nemo Incognito said...
6:48 PM  

That's SWAPPED Landesturds, leftback. Swapped. Turds.

Steve said...
7:01 PM  

3.18 on TNX. 3.95 on TYX.
Spreads widening across the board.
Holy Flight-to-Quality, Macro Man!

leftback said...
7:05 PM  

All the german landesbanks have big balanche sheet problems. I am aware of one large one beginning with W that is shopping 100 yards of EUR "problem" assets to be managed out of shop.

Also re: currency swap lines, a big factor in the delevering pushing up the USD was the conduits, SIVs (the "shadow banks") had a massive currency mismatch...they had been funding non-USD assets in the NY money markets and swapping the assets to create synthetic dollars. When the money markets dried up and FX swap lines shrank it forced them to liquidate and rec EUR and buy USD to repay part of the liability in NY.

That slowed down with the swap lines, but there are large losses effectively hiding behind the notional value of those swaps.

Those dollars have gone. Another deflationary arrow.

Anonymous said...
8:06 PM  

Leftback,
The flight, it actually started back in August with bonds.

I was also the one that said don't fight the flow on the USD$ which then took on a life of it's own as people suggested all sorts of silly crap which had nothing to do with my statement.

Going with the flow and hedging with gilts back in August made it possible to take what the market had to offer for as long as it wanted to give it.

The fact that the USD trade is getting it's bollocks squeezed now is academic to what I was saying.

Anonymous said...
9:34 PM  

>> if Geithner, Almunia, or A.N. Other would stand up to the BRICs

Almunia stand up to Russia and China? The guy is a life long member of the PSOE, a key member in Stalin's Popular Front during the civil war.

Crisis Management said...
11:22 PM  

Almunia trips Torres just inside the area, and Gerrard scores from the spot.

Hope you had your risk off trades working today, MM, a lot of us did. The Bears ARE back in town.

leftback said...
11:49 PM  

Dont worry. I last case we got Iran to nuke and strength the dollar.

If that doesnt work we nuke Venezuela. Or Russia, or...

The problem is, €uro has self life and politics cant help much.

Anonymous said...
12:16 AM  

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