First some house keeping. EUR/GBP closed favourably but we weren't nimble enough when it dipped in eur/jpy and had to take a hit. And once again we will hit ourselves over the head with the wooden plaque on our desks engraved with the words "JPY will remain difficult DO NOT TOUCH". Serves us right.
If the markets are a marathon race and each asset class is a runner then it looks as though FX has made a break and taken the lead with other asset classes now following behind. We see equity indices back to trading via currency values rather than in lock step, FTSE and GBP/USD, Nikkei/ jpy ( obviously), SPX/USD and so on. Old fashioned stuff. Of course having FX back at the fore is great for FX traders, but only up to a point. We are worried that FX has spent so long following other markets it may have forgotten how to do its own navigation and is likely to get lost or at least confused as to which way to go.
The market response to the G7 statement yesterday was, to us, a clear example of a market desperate for direction, looking for a sign and yet struggling to make its mind up as to what the sign said. TMM believe that expecting any clear statement from the G7 on any policy is foolish. TMM have lived through many G7 statement events and each time we have seen a market try and pick the bones out of a statement that, by its very nature, has to couch compromise and noncommittal flexibility within a wrapper of perceptual agreement.
"We, the G7 Ministers and Governors, reaffirm our longstanding commitment to market determined exchange rates and to consult closely in regard to actions in foreign exchange markets. We reaffirm that our fiscal and monetary policies have been and will remain oriented towards meeting our respective domestic objectives using domestic instruments, and that we will not target exchange rates. We are agreed that excessive volatility and disorderly movements in exchange rates can have adverse implications for economic and financial stability. We will continue to consult closely on exchange markets and cooperate as appropriate."
Which as a sign of direction to the FX markets is as good as this
But the point we note is that "remain oriented towards meeting our respective domestic objectives using domestic instruments" does not preclude manipulation of FX as, apart from direct intervention, the tools currently being employed to manipulate FX are those very "domestic instruments". So in a way they are saying they will not directly intervene (will let the markets set the level), but they will all individually be pulling the relevant domestic levers to make the market move the way they want. In other words the FX wars are going to be fought like the Cold War. No nukes, lots of public smiles but a lot dirt, manipulation and the odd assassination behind the scenes.
This morning's statement from Mervyn King backs this up as it is clear he is going "George Smiley" on us.
Where does that leave us? Well we wonder how long the equity market will let the fickle and dithery FX market lead the way and, having got bored of waiting for something clear cut, will continue on their own path. Having had a couple of weeks of range without the correction that we were worried about we are now to get back on the train we got off. But with a US holiday ahead we will probably wait and give ourselves a couple more days.