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Monday Currency Report
Despite it not being officially on the agenda, currency wars seemed to take up much of the G20's head-space over the weekend. The result of all their collective thinking; absolutely nothing.
Japan were let off the hook over the weekend and the Yen continues its push towards three year lows this morning because of it. The Nikkei has also surged on the fact that Japan wasn't singled out by leaders during the talks - previously there had been fears that direct criticism would lead to a toning down of policy by the Japanese government and that this could strengthen the Yen and weaken the stock market. However Shinzo Abe was able to talk up his policies during the Asian session overnight and in doing so caused a 2% move higher in the stock market.
The embarrassing lack of criticism, in our minds, has actually endorsed active depreciation. The market will now continue its one way bet on the Japanese Yen because, by all accounts, Japan's actions have got a seal of approval from the G20 - despite it being at a direct cost to them. The move also paves the way for other central banks to do, or continue doing, similar and artificially weakening their currencies. The only caveat the G20 have put in is that these moves can't be direct intervention in the FX markets - the move lower must be as a result of policy tools such as quantitative easing. That's not a caveat, that's a win win! No one will be surprised if there's a queue of central banks and governments waiting to announce their revised monetary policies in the coming months - who could blame them.
The other piece of news worth noting is that if you're a big corporation and you aren't paying tax, governments are going to talk about coming to get you. George Osborne led the calls for countries to work together to ensure multi nationals are correctly taxed/at least paying something in the countries that they operate within. An action plan will be presented to the G20 in July...
Elsewhere over the weekend, Cyprus elections proved fairly positive, though there weren't quite enough votes to get pro bailout candidate,Nicos Anastasiades, a full majority. There will now be a runoff vote next weekend, where it is likely he will get the votes needed to begin the task of finalising a bailout that is roughly equivalent in size to one whole year's worth of GDP.
Looking to this week, markets will be concentrating heavily on the state of the eurozone. Following last week's worse than expected GDP numbers, extra scrutiny will be placed on February's economic surveys. Mario Draghi will be making his quarterly testimony to the EU parliament, where some tough questions will be asked on the performance of the eurozone and his thoughts on the value of the euro, particularly given the G20's underwhelming approach to curb government interventions.
After Friday's poor retail sales data from the UK, the Pound starts this week at the bottom of recent ranges. Wednesday's publication of Bank of England meeting minutes will provide insight into who's pushing more QE for the struggling UK economy (potentially more Sterling weakness here if there's seen to be a growing appetite for further monetary easing)
The US will get off to a slow start as it's a market holiday to day (Presidents Day). Later in the week it will be the usual suspects, unemployment, manufacturing data and Fed meeting minutes to digest - probably mostly pointing to a continuation in their recovery, but a very slow one.
Away from data releases, we expect the market to grow more anxious about the fate of Italy as elections draw near. We also expect Spain to delve deeper into Mariano Rajoy's preferred funding methods, potentially further unseating confidence in the Mediterranean.
Thank you CM Trading
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