What’s Changed?

April 4, 2013

This important week in the global economy has changed some things in foreign exchange but left even more relationships in a purgatory between the bust of 2008-09 and the next definitive stage.  Market and real economic conditions might cave into a Stockmanesque chaos.  While there is wide agreement that much could yet go wrong, a dispersion over the greatest dangers is wide.  Some fear inflation, others another great recession.  Disagreement exists over the cost-benefit balance of quantitative monetary easing and the danger of political stalemate surrounding fiscal policies and structural reforms.  Uncertainty surrounds what will be done to address economic imbalances as well as what ought to be changed.

A foggy economic landscape such as exists now promotes currency stability except in those cases where political leadership has sent out strong signals about currency preferences. 

The Abe government and Bank of Japan are conducting a policy experiment in which additional yen depreciation is a necessary but not sufficient intermediate goal for ultimate success.  The possibility that the BOJ would muster only a half-baked plan had stalled dollar/yen in the low 90s against the dollar.  A resumed significant decline of Japan’s currency now becomes an early reality check for the new program. 

The euro/dollar relationship continues to be pulled strongly toward $1.3000, closing at 1.3193 in 2012 and at 1.2934 today.  That’s not to say that it doesn’t veer away from that center temporarily, only that it lacks escape velocity.  ECB officials are not happy with Japanese yen policy but are too principled to combat it tit for tat.  A rate cut this week justified in part as a preventative move against possible euro appreciation might have put a brake on the yen’s slide, but that option wasn’t seized.  Being immersed in recession, unlike Japan or the United States, the ECB actually has the strongest case to be first to ease policy.  Failing to act prevents the euro from falling below its long-term average.

Year-to-date changes in the Canadian, Australian and New Zealand dollars have likewise been insignificant.  The first two are not far from $1.0000, a level with obvious as well as historical roots in these currency pairs. 

Sterling has weakened by a dime since the start of 2013.  The British economy was misdiagnosed by the Conservative Government, and the policy response has made the current account and other conditions like economic growth only worse.  The Bank of England gets a new governor in three months.  The outgoing governor was likely part of a minority dissent at today’s meeting for a third straight time.  A central bank leader who can’t bring a majority of other monetary policymakers around to their view is not the kind of image that inspires market confidence in a currency.

Chinese officials are happy to keep the yuan stationary, which hasn’t drawn much attention from the U.S. or other foreign governments.  It’s sitting on 6.301 now versus 6.232 at the end of 2012.   The Swiss franc likewise continues to shadow the euro, and since the common European currency has been tightly confined, so has movement of the Swissie against the dollar.

In short, while these are interesting times from a global macroeconomic standpoint, the arena of foreign exchange has become pretty boring.

Copyright 2013, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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