Hildebrand: "No Such Thing As A Global Currency War"‏

The headline is ‘borrowed’ from an opinion by the former SNB chairman Philipp Hildebrand that appears in today’s FT. Hildebrand argues that central banks are simply doing what they are meant to do, and what they have always done. He argues that central banks simply set monetary policy to comply with their domestic mandates, and with rates at the zero bound they have no other option than to revert to unconventional measures.

He argues that this has nothing to do with ‘currency wars’, but he still fears that policymakers will try to grab the headlines at this week’s G20 meeting shouting ‘currency war’.

We very much agree with Hildebrand’s view that the ‘currency war’ debate has reached an almost absurd level. We recommend that our clients take all the ‘currency war’ comments and warnings with a grain of salt. At the end of the day, we doubt that the ‘debate’ is going to change much in the FX market both ahead of and after this week’s G20 meeting.

We received an important official response today from the G7:

We, the G7 Ministers and Governors, reaffirm our longstanding commitment to market determined exchange rates and to consult closely in regard to actions in foreign exchange markets. We reaffirm that our fiscal and monetary policies have been and will remain oriented towards meeting our respective domestic objectives using domestic instruments and that we will not target exchange rates. We are agreed that excessive volatility and disorderly movements in exchange rates can have adverse implications for economic and financial stability. We will continue to consult closely on exchange markets and cooperate as appropriate.

It is hard to argue that the rather short G7 message contains any news but this is good news. The key message is once again - as it is in the Hildebrand piece - monetary policies will remain oriented towards domestic objectives.

The statement supports our view that the yen sell-off will persist and that eurozone monetary policy will continue to be out of sync with the monetary policy of the Fed, the Bank of England (BoE) and the Bank of Japan (BoJ). If anything, the G7 statement should add support to the euro and further hurt the Japanese yen, as the big market concern has been that the G7 and the G20 would be more focused on the BoJ rather than the latest yen depreciation.

The G7 statement does not necessarily the term ‘currency war’ will disappear all together. Countries such as Brazil and France might still do what they can to place the theme high on the agenda ladder over the next couple of days, at and ahead of the G20 meeting in Moscow on February 14-15.

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