Why the global “monetary truce” might not last


A weaker dollar accompanied by a surprisingly more accommodating Federal Reserve fuels the idea that global policymakers have struck some kind of soft deal to at least call a truce in the “currency wars” that have seen central banks in the world. world compete to weaken their respective currencies in a bid to steal the export business of the other.

But don’t get too comfortable. “Can policymakers grasp defeat from the clutches of a monetary ‘truce’ victory?” Of course they can, ”wrote Alan Ruskin, Deutsche Bank macro-strategist and a leading proponent of global policy coordination.

A DXY dollar that gets stronger,
which had been in rally mode since mid-2014, exacerbated global monetary tensions and contributed to the instability of global financial markets. The rally in the dollar, however, at least seems to be on hold.

Read: Wall Street is betting the ‘big dollar correction’ is just beginning.

At the very least, policymakers, especially in the United States and China, might recognize that a greater dollar strength is not in the interest of the United States or the global economy, said Ruskin in a Tuesday note. See: Why it’s too early to declare the currency wars over.

“A break in the dollar’s bull march could help besiege dollar pegs, commodity prices, related high yield, restrict inspired reserves [quantitative tightening], and ease repayment pressures on USD debt, ”he wrote. “And for a few weeks at least, that is exactly what seems to have materialized.”

So far, so good. But it’s a difficult balancing act. While a weaker dollar is good news for emerging markets, too much weakness will not be welcomed by the European Central Bank and, in particular, the Bank of Japan. Ruskin explains:

The most obvious contradiction right now in play is how to match a slightly weaker dollar against [emerging markets] do not turn into too much weakness of the USD compared to the likes of EUR EURUSD,
. For Japan, as the strength of the JPY bolsters the Nikkei NIK,
weakness, this monetary peace must already look more like a new front in the old currency war. Here, a certain perspective is important: the yen is still one of the cheapest currencies in [producer-price parity, fundamental equilibrium exchange rate and behavioral equilibrium exchange rate] and the recent strength of the yen is only a partial correction of past weakness. While the focus was on the period of yen weakness between 2011 and 2015 against the USD, the depreciation of the yen was even more noticeable against the CNY (Chinese yuan). What we see now is CNY / JPY CNYJPY,
revert to the range that had prevailed for most of the previous 20 years. The gain from China (lower TWI) could not come without the pain from Japan!

It wouldn’t be so disturbing if the tensions were confined to Japan. Unfortunately, recent events have “exposed the limits of politics beyond the BOJ,” he said.

So what does Ruskin prescribe? He argues that the best bet would be an attempt to lock in exchange rates near current levels in an attempt to create a “more stable USD / China axis; less pressure on commodities and commodity currencies; a JPY that does not trigger a rout of the Nikkei that undermines support for global stocks, or raises more questions about the effectiveness of unorthodox policies; a EUR that does not jeopardize the fragile recovery of EUR areas, nor encourage more political instability. “

In other words, “if politics could kill the FX [volatility] for a while that would suit their cause.

But that doesn’t mean markets will deliver what policymakers want, or that policymakers will do much more to keep volatility under wraps, “neither should they,” he wrote. In reality, nothing shields markets from a new wave of Chinese-led volatility, and currency concerns won’t ultimately stop the Fed from raising interest rates, he says.

“A more stable dollar may be a necessary condition, but by no means sufficient, to support and stabilize risky assets. Profit-depleted stocks and surplus commodities, minimal growth needs, not just a more stable dollar, ”Ruskin wrote. “Monetary policy has come to an interesting stalemate, where the best solution would be to extend the ‘truce’, including the yen. Hit the pause button and talk about stability.


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