Once again some analysts in Europe
question the potency of the
so-called currency wars launched by
Japan and the US. The euro-yen
currency cross has had an
unprecedented rally, changing the
export landscape where Japan and
Europe (particularly Germany)
compete.
|
Yen per one euro (EUR/JPY) |
The impact of this adjustment in
currencies is quite visible in the
shares of exporters. The chart below
compares share prices of Volkswagen
and Toyota - as an example. It
demonstrates once again how
effective currency wars can be (
see
discussion). Weak yen is making
Japan's products cheaper and/or
margins higher.
|
Toyota (blue) vs. Volkswagen
(red) |
This trend is likely to negatively
impact the Eurozone's economy,
which, for the first time since the
start of the euro crisis, is
starting to show signs of recovery (
see
post). The question now is
whether the ECB is going to
"retaliate" in the currency war by
attempting to weaken the euro.
Bloomberg: - Since the
European Central Bank president
talked up the economic outlook
last month and signaled that the
worst of the debt crisis is
over, the euro has surged to a
14-month high against the
dollar. Banks have fueled the
euro’s rally by paying back more
emergency loans than forecast,
shrinking the ECB’s balance
sheet just as the Federal
Reserve and the Bank of Japan
expand theirs.
That’s threatening to stymie
Europe’s recovery before it has
begun, highlighting the
tightrope Draghi is walking as
he seeks to boost confidence
without encouraging euphoria.
With looser monetary policy in
the U.S. and Japan weakening the
dollar and the yen, the ECB may
soon come under pressure to
enter the so-called “currency
war” and rein in the euro,
economists said.
“The euro-zone economy needs
a rising euro like it needs a
hole in the head,” said Nick
Kounis, head of macro research
at ABN Amro in Amsterdam. “If
verbal intervention does not
stem the euro’s upward trend,
the central bank may eventually
once again consider rate cuts.”
So far however the ECB has stayed
away from direct asset purchases.
Bloomberg: - “A significant
shift is underway in global
central banking,” said Paul
Mortimer-Lee, global head of
market economics at BNP Paribas
SA in London. “There is a
worldwide currency war and the
ECB seems to be a central bank
that is not targeting the real
economy as much as the Fed, the
Bank of Japan and the Bank of
England,” he said. The ECB
“risks being the loser.”
It is expected that Draghi will
retain a highly dovish stance (as he
announced today) with respect to
the ECB's policy but will not
explicitly target a lower euro.
Barclays: - ... Draghi may
adopt a more dovish tone to
convince market participants
that monetary conditions will
remain loose, but we view any
specific ‘talking down’ of the
EUR as unlikely. Based on
the check-list of indicators
from the ECB’s January press
conference (CDS prices, stock
market indices, realised
volatility, capital inflows,
Target 2 imbalances, confidence
indices, current account
balances), market developments
are likely to be viewed as
broadly positive by the ECB more
than offsetting any negative
impact from EUR strength.
What makes Draghi's situation
particularly difficult is the fact
that the Eurozone banks have been
repaying some MRO and LTRO loans.
That is resulting in declines in the
EMU's monetary base (as bank excess
reserves drop). At the same time the
monetary base has been on the rise
in Japan, the US, and the UK. This
differential in base money growth
(h/t
Evil Speculator) continues to
pressure the euro higher (although
we are seeing a bit of a reversal
today). And European politicians as
well as some bureaucrats are
beginning to argue that something
should be done. For now, however, it
is expected that the Eurozone will
have to tolerate the relative euro
strength, as the ECB stays out of
the currency wars.
|
Source: ECB |
Econoday (today's ECB
announcement): - Perhaps more
significantly, Drahi's opening
remarks made no mention of the
exchange rate despite some
speculation that the central
bank might have become concerned
by the euro's recent
appreciation. However, in
response to questioning, he
commented that current levels of
both the nominal and real
effective exchange rates are
close to their long-run
averages. This may not be
what the ECB would prefer given
the weakness of Eurozone
domestic demand, but it also
suggests that for now at least,
the level of the single currency
is not a major factor in setting
monetary policy. In turn,
this may be seen by speculators
as a green flag to take the euro
still higher.
SoberLook.com
http://soberlook.com/2013/02/the-ecb-staying-out-of-currency-wars.html