Wednesday February 13, 2013 - 11:46:04 GMT
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G7 Statement on FX - "we will not target FX rates" - Abe? Abe? Bueller? (FXA)
G7 surprised most with the early release of a statement on FX ahead of the Moscow G20 summit. The timing while interesting probably has to do with logistics at G20 – simply no time set aside for G7 gathering ahead of G20 and in light of the meeting being in Moscow, to hold G7 without host Russia (G8) would be bad manners.
The statement steps up FX language from the Mexico City G7 statement on FX by including language on a clear opposition to targeting exchange rates. Clearly Japan is not officially targeting a yen level, but officials there have near daily public statements including levels in the yen they would like to see reached. Economics Minister Amari on Monday went a step further and mentioned a level for the Nikkei – 13,000 would be peachy. Given the near perfect correlation between the Nikkei and yen, Forest Gump knows 13,000 on the Nikkei implies a level (of depreciation) for the yen.
But as was pointed out the G7 statement also ruled out using foreign instruments to support growth – this implies central banks at the zero bound should buy domestic not foreign securities to attain QE objectives. So that rules out unsterilized foreign bond purchases theoretically. Keep in mind as recently as January Abe was threatening to change the BOJ legal remit to allow it to buy unlimited foreign bonds. Officials in the Abe cabinet are no longer talking about reforming the BOJ remit to buy foreign bonds and would suspect that part of that was do to official push-back from rest of G7 as well as from BOJ itself.
This brings up another case of G20 “off-the-reservation” behavior on FX – SNB. The SNB targets a ceiling for the CHF versus EUR at 1.20, buys foreign bonds without sterilizing the operation (has accumulated an enormous stockpile of foreign reserves) and is working overtime to protect Swiss exports. So it is no wonder that the SNB is all over the tapes in the wake of G7 statement proclaiming its intention to carry on with existing policies of targeting a CHF ceiling and buying of foreign bonds. It also said it is ready to take further action if needed (like lowering the ceiling to 1.25?).
Is G7 action today a game changer for the short yen trade? Probably not. But it may slow the pace of the decline without Japanese officials daily referring to dream levels for the yen. And Japan has a good precedent to continue on its current course of BOJ balance sheet expansion (yen printing) by buying ever more JGB’s and domestic assets – the Fed. Nothing in G7 statement changes the capacity to support growth through domestic debt monetization or asset purchases and there is proof positive (all else being equal) this is negative for a currency.
In closing I would say that G7’s latest call to action was triggered by what was unfolding in Japan not Switzerland. But in the light of day Japan has plenty to hide behind, however Switzerland (SNB) is as naked as the protestors in Saint Peter’s Square today protesting the resignation of Pope Benedict.
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