Cur­rency war strikes truce in Asia-Pa­cific as Fed weighs liftoff

The Pak Banker - - COMPANIES/BOSS -

Cen­tral bankers across the Asia-Pa­cific re­gion are lay­ing down arms in the global cur­rency war as they pre­pare for the Fed­eral Re­serve to raise in­ter­est rates. By drop­ping a call for a weaker ex­change rate in his mon­e­tary­pol­icy state­ment on Tues­day, Re­serve Bank of Aus­tralia Gover­nor Glenn Stevens fol­lowed the lead of New Zealand's Graeme Wheeler, who toned down con­cern the kiwi dol­lar was too strong two weeks ear­lier. In Ja­pan, Haruhiko Kuroda said last month he had no plans to ex­pand the record mon­e­tary stim­u­lus the cen­tral bank is pump­ing into the econ­omy.

That doesn't nec­es­sar­ily mean an end to losses for the cur­ren­cies of the re­gion's ma­jor de­vel­oped economies. Rather, it shows the prospect of an in­crease in U.S. in­ter­est rates is re­liev­ing pres­sure on peers to loosen pol­icy. Aus­tralia's dol­lar has al­ready tum­bled to within a cent of strate­gists' me­dian pre­dic­tion for yearend, while New Zealand's kiwi and the yen dropped be­low their fore­casts in June and July. "This is a tem­po­rary truce based on a Fed rate in­crease," said James Rickards, au­thor of "Cur­rency Wars: The Mak­ing of the Next Global Cri­sis" and chief global strate­gist at money man­ager West Shore Funds. "These banks are go­ing to stand pat in an­tic­i­pa­tion of" the Fed, "mak­ing the dol­lar stronger and their cur­ren­cies weaker, with no fur­ther ac­tion by them."

In his state­ment af­ter leav­ing the main rate un­changed at an all-time low of 2 per­cent, Stevens re­ferred to the prospect of higher U.S. bor­row­ing costs and said the Aussie "is ad­just­ing to the sig­nif­i­cant declines in key com­mod­ity prices." It was the first time in more than a year that he re­frained from sig­nal­ing the cur­rency was too strong.

Aus­tralia's dol­lar jumped 1.3 per­cent, the most in two months, to 73.80 U.S. cents on Tues­day. That's up from a six-year low of 72.35 on July 31 and com­pares with the 72 cents strate­gists pre­dict for year-end. The Aussie was at 73.76 as of 8:09 a.m. New York time on Wed­nes­day.

"Heat has come out of the cur­rency wars," said Sean Cal­low, a strate­gist at West­pac Bank­ing Corp. in Syd­ney. The stronger U.S. dol­lar is "a key fac­tor" here, he said.

Even so, Stevens needn't worry about a sus­tained Aussie rally, Cal­low said.

New Zealand's dol­lar is lit­tle changed since Prime Min­is­ter John Key, a for­mer head of cur­rency trad­ing at Mer­rill Lynch, said July 20 the ex­change rate had fallen faster than an­tic­i­pated. The kiwi tum­bled to a six-year low of 64.99 U.S. cents on July 16, a week be­fore Re­serve Bank of New Zealand Gover­nor Wheeler cut the main in­ter­est rate. That com­pares with strate­gists' 65-cent me­dian year-end forecast.

Wheeler, in an­nounc­ing the pol­icy move, omit­ted pre­vi­ous ref­er­ences to the New Zealand dol­lar's level be­ing un­jus­ti­fied and un­sus­tain­able, a key cri­te­ria for in­ter­ven­tion. He did say fur­ther declines in its value were nec­es­sary for the econ­omy.

"Cen­tral banks around the world have been wait­ing for the Fed to raise rates," said Chris Chap­man, a fixed-in­come trader at Man­ulife As­set Man­age­ment in Lon­don. "The RBA and RBNZ have ad­justed their com­ments" be­cause they've seen "sub­stan­tial declines this year and have prob­a­bly reached lev­els they're more com­fort­able with."

For Aus­tralia and New Zealand, the neg­a­tive im­pact of hav­ing a weaker cur­rency is start­ing to over­shadow the ben­e­fits, said Hideki Shi­bata, se­nior rates and cur­ren­cies strate­gist at Tokai Tokyo Re­search Cen­ter.

"Cur­rency de­pre­ci­a­tion is ap­proach­ing its limit given the ris­ing risk of weaker de­mand from over­seas in­vestors" for the na­tions' se­cu­ri­ties, he said.

US cen­tral bank head Janet Yellen has been in­creas­ingly ex­plicit in re­cent months about the po­ten­tial for higher rates as the re­cov­ery in the world's largest econ­omy gath­ers pace. Fed Bank of At­lanta Pres­i­dent Dennis Lock­hart said in an in­ter­view with the Wall Street Jour­nal that the cen­tral bank is close to a Septem­ber rate in­crease.

While West Shore's Rickards says the Fed won't raise bor­row­ing costs from near zero this year, traders are pric­ing in about a 76 per­cent chance the Fed will act at or be­fore the Fed's De­cem­ber meet­ing. That's based on the as­sump­tion that the ef­fec­tive fed funds rate will av­er­age 0.375 per­cent af­ter the first in­crease.

The yen has slumped 12 per­cent since the Bank of Ja­pan last ex­panded its as­set-pur­chase plan in Oc­to­ber, and in June slid to a 13-year low of 125.86 to the dol­lar, weaker than the 125 me­dian year-end forecast in Bloomberg's sur­vey.

BOJ Gover­nor Kuroda ruled out an ex­pan­sion to bond pur­chases for now, even af­ter the cen­tral bank trimmed its in­fla­tion fore­casts.

"The prospec­tive Fed rate hike will do a lot of the heavy lift­ing on these FX crosses," said Grant Peterkin, a money man­ager at Lom­bard Odier In­vest­ment Man­agers in Geneva, which over­sees about $170 bil­lion. "They don't need to be as ex­plicit as they've been be­fore."

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