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Week Ahead: battle lines drawn for currency face-off
Our preview of the main financial events of the coming week.
The race to the bottom in the currency markets – a tactic to make exports more competitive – continues, with the Europeans, Japanese and Brits making their positions clearer.
Central bank attempts to weaken their currencies, known as ‘competitive devaluation’, and the impact this has around the world, are increasingly becoming the focus of policymakers. And in the coming week, countries involved in this global face-off, or ‘currency war’ will be judged by their peers at a meeting of the G20 in Moscow.
Japan, which has enjoyed rapid yen depreciation in recent months after promises of strong action from new prime minister Shinzo Abe, is the ‘poster child’ for how currencies can alter a country’s economic outlook, as Bank of America Merrill Lynch’s Michael Hartnett puts it.
In Europe the euro has moved in the opposite direction to the yen, prompting French president Francois Hollande to urge a euro rate target. Then Europe’s real power broker, European Central Bank president Mario Draghi, donned his flak vest, saying that he would ‘monitor’ the currency as it was a risk to inflation. The result was steep euro losses on Thursday.
In the UK, incoming Bank of England governor Mark Carney stayed clear, telling MPs on Thursday that central banks should only intervene in currencies as a last resort. The pound though is already doing a good job of depreciating under the stewardship of current governor Meryn King.
Emerging market authorities have been among the most vocal of currency warriors in the past, led by Brazil. But Brazil is calling a ‘truce’ (not all-out capitulation), says HSBC’s Marjorie Hernandez, amid competing concerns about the inflationary risk of a weaker real.
South Korea, which has been losing competitiveness to nearby Japan, has instead been more aggressive, perhaps setting the scene for next week’s G20 meeting. Shin Je Yoon, South Korean finance minister argued for capital controls (controversial measures to restrict damaging money flows into a country), saying they ‘should be recognised as common policy tools’.
Russian deputy finance minister Sergei Storchak however told Reuters last week that the focus of the two day G20 meeting starting on Thursday should be on reducing debts rather than focusing on accusation of Japan’s ‘competitive devaluation.
But with currency markets ‘the new “automatic stabilizer” for growth’, as Hartnett puts it, G20 leaders focused on reinvigorating the global economy can’t avoid but take the fight the Moscow.
Watch 'Currency Wars: what are they and why do they matter?'
Eurozone still in recession
Eurozone finance ministers are holding their own meeting next week, where discussions on a bailout for Cyprus and restructuring of Anglo Irish Bank are likely.
Market attention will also be focused on GDP figures for the eurozone, which are expected to show that the bloc remained in recession for a fourth quarter of 2012.
Meanwhile, market angst continues to grow ahead of Italy’s elections at the end of February, where polls show anti-austerity Silvio Berlusconi is gaining ground.
Spain’s woes are also back in the news amid corruption allegations against Mariano Rajoy’s ruling Partido Popular.
In the UK, the focus will be on inflation.
Inflation data for January is due on Tuesday, with no major change expected from the current 2.7% level, as measured on the consumer prices index (CPI) gauge.
Then, on Wednesday, the Bank of England will publish its quarterly inflation report, outlining its expectations for economic growth and inflation. Mervyn King’s subsequent press conference will be watched closely for clues as to whether the Bank is set to expand its asset purchase programme beyond the existing £375 billion.
Retail sales numbers are also due in the UK next week.
US economic recovery, Chinese holiday
In the US, the focus will be on tackling unemployment. President Barack Obama is due to deliver his State of the Union address on Tuesday. ‘I'm going to be talking about making sure that we're focused on job creation here in the United States of America,’ he said this week.
There will be opportunity to scrutinise Obama’s track record in protecting the US economy with data due on retail sales, industrial production and consumer confidence.
In Asia, no action is expected from the Bank of Japan at this week’s policy meeting, while fourth quarter GDP numbers are due for Japan.
In China, the week-long Lunar Holiday likely precludes any major financial news.
FTSE 100 Diary
Barclays (BARC.L), one of the Citywire Top Stocks, becomes the first of the major British banks to report full-year earnings this week, with final results due on Tuesday (the others don’t deliver final result for another few weeks).
Then on Friday, Anglo American (AAL.L) alone among London blue chips provides its full-year report.
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by Gavin Lumsden on Oct 23, 2016 at 00:01