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G7/20 FX Politics - Wrestlemania - real or make believe? (FXA)
With the week ending and G20 finance ministers gathered in Moscow for a regular meeting on international economic policy coordination (yes that is its purpose), I must say this is one of the more bizarre weeks in the field of G7 FX politics that I can remember. And we still have the weekend to look forward to for more bizarre moments as the main meeting ends Saturday with a statement and press conferences from attendees.
I can’t recall a time when G7 rushed out a statement just days ahead of G20 on currencies following (assuming here) a conference call. Why couldn’t ministers and central bankers from G7 wait a few days when they would be face to face in Moscow and do what they normally do – meet Friday evening at dinner ahead of Saturday’s G20 formal meeting?
Cleary someone drove this process with a degree of urgency. In light of the WSJ report (deep background – Sudeep Reddy) Sunday, press briefing from Lael Brainard, US Treasury Under Secretary Monday filling in for Treasury Secretary Nominee Lew yet to be confirmed, G7 statement Tuesday and the US Treasury clarification to G7 statement Wednesday (also deep background) I have to think it was US Treasury – Brainard in consultation with incoming Treasury Secretary Lew went into low level crisis mode.
Brainard today after a less than discreet tongue lashing from Bank of England Governor King on Thursday, restated her (the US) concern…G7 is opposed to any country using foreign instruments (buying foreign bonds, selling local currency) to support domestic growth and went on to say that G7 is opposed to “loose lips” on FX levels (read government of Japan’s near daily missives mentioning levels and ranges for the yen versus the dollar). King’s point was there was nothing in the G7 statement that referred to any specific nation or currency.
However, this only goes part of the way in explaining the policy response from the US Treasury. Admittedly without all the facts one can only speculate what happened. I think there is a key component missing in the story that would explain the unusual effort by Treasury (also an assumption) to get out a G7 statement on currencies ahead of G20 somewhat urgently. I think in private Japan made its intention to buy foreign bonds as a means of supporting growth. Maybe this was buying of US Treasuries, European bonds and regional bonds from the governments of Asia, including South Korea. Abe and his LDP supporters spoke often of just such an approach for the BOJ if elected…and indicated a willingness to change BOJ law to allow this to happen. Since the election the Abe crowd has not said much else about foreign bond buying as an instrument of monetary and fiscal policy. But maybe they have in private – with US officials and not UK officials, not BOE Governor King.
Press reports also indicated that the G20 draft communiqué was sent out February 11 and it lacked language that would put Japan at bay on foreign bond buying. So an added reason to get something out from G7 early and hope that G20 had time to look it over and adopt in its statement.
Unfortunately for G7 messaging the communications had as many problems as the message itself resembling at times professional wrestling in the USA – lots of histrionics, faux violence and no victims…not unlike the FX war itself. And yet at times, like Thursday with the Bank of England Governor weighing in the faux wrestling took on far more real look and feel – like Andy Kaufman and Jerry Lawler…where does acting end and reality starts Andy Kaufman, Jerry Lawler, Letterman ?
Where does that leave the yen? Pretty unimpeded in its downward trajectory. The attempts by US Treasury to instill some two-way risk into a market very short yen has failed under a cacophony of Wrestlemania. Japanese government officials can continue business as usual so long as it does not conduct unilateral intervention – loose lips sink currencies infractions are hardly going to get the goat of more than US Treasury very clearly. Even Draghi belittled the fuss over currencies (weak yen) in remarks from Moscow today. Maybe Brainard will expose Japan’s behind the scenes (presumed) maneuvering Saturday for all to see and win over more of her G7 brethren to what Japan is really up to but that seems wishful as well as unlikely. No the G7 professorial types like King and Draghi won’t really get what Japan is up to until the yen is a lot lower from current levels – north of 100 per dollar and 135 per euro.
Stay tuned for G20 final communiqué and G7 attendee government/central bank press conferences Saturday.
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