RPT-QE and yen-inspired ructions in store, even if no currency war
By Mike Dolan
LONDON May 10 (Reuters) - Most investors see the yen's latest lunge as a byproduct of the rich world's money printing gambit and not a deliberate escalation in a notional currency war, but it is raising concerns about possible new ructions.
The yen slid to a 4-year low on Friday, adding to losses of more than 20 percent against the dollar in the last six months as Japan's Prime Minister Shinzo Abe applies an aggressive monetary and fiscal expansion to try and jump start his moribund economy.
Significantly, the dollar/yen exchange rate popped above the psychologically important 100 rate that had capped it for weeks.
Even before Friday's moves regional export competitors were already struggling to keep their currencies competitive with the yen via open market intervention or domestic interest rate cuts, as in the case of South Korea on Thursday.
Although clearly uneasy about sharp exchange rate movements of any sort, Japan's allies in the Group of Seven economic powers meeting near London on Friday broadly repeated their stance that undirected currency moves resulting from appropriate central bank policies were acceptable.
Given most of rests of the G7 are also engaged in similar forms of money printing, that may be unsurprising. But the green light was also flashed last month by the broader G20 grouping that includes the big developing economies too and an escalation of diplomatic rows over the issue seems unlikely.
So have the warnings of Brazil and other emerging nations over recent years of imminent currency wars - whereby western economies crippled by the credit crunch purposely devalue their currencies for growth-boosting trade gains - missed the point?
Most global investors now doubt currency targetting per se is the prime driver for the yen. The sequencing of gigantic central bank bond buying and money printing is much more dominant in leading currency moves, even if that may well have similarly disruptive effects on developing economies over time.
"I wouldn't use a term like currency war. What the market is assimilating and pricing and reacting to are central bank policies," said Scott Thiel, head of European and Global bonds at the world's biggest asset manager, BlackRock - which has almost $4 trillion in assets under management.
Thiel, who expects the yen to fall further and described 120 per dollar as a reasonable view over the next year, said today's move was as much to do with the dollar side of the equation.
With relatively upbeat U.S. economic data, the cheap domestic energy boost from the shale story and the prospect of U.S. corporate repatriation flows, he said, the dollar was set to benefit from the fact that the U.S. Federal Reserve would be first to wind down its QE program.
"In terms of the sequencing of QE, the Fed will be first and the Bank of Japan will be last."
QE SWAMP AND EMERGING MARKETS
Direction then, rather than conviction in any equilibrium currency prices or fair value, is seen as the big driver.
"We have to take a deep breath and realize that the level of intervention has never been this great - it is absolutely enormous," said Thiel. "There's just no time in history when this has been so massive and therefore to trying to assess the value currencies is challenging."
Others agree that Japan is ostensibly playing by the rules set out by the G20 and International Monetary Fund.
"If the market prints 100 or 200, G7 or G20 cannot do much because they are abiding by the guidelines," said Stephen Li Jen, founder of the eponymous hedge SLJ Macro.
Dan Morris, global strategist at JPMorgan Asset Management, said the yen fall may hurt Korean and German exporters, although the latter was likely to be used to coping with strong currency and, more broadly, the yen was merely correcting excess, crisis-related strength.
"It's on the fundamentals, it's viable - the yen was just way too strong before," he said, adding 100-120 was comfortable.
Marc Chandler, head of currency strategy at Brown Brothers Harriman in New York, said G7's was less concerned about what was going on between their economies than within them.
"The main fissure is within countries and that has taken the form of austerity."
But even if this is not some stepped-up currency war per se, the effect of rich country money printing over recent years has been to flood smaller emerging economies with investment capital seeking higher bond returns than the zero or even negative real rates on offer in home markets.
Jitters about a reversal of these flows are rising as many mull the possible end of the whole process if the Fed starts to wind it down over the next year.
And an accelerated yen fall, which some say mirrors the lead-up to Asian and emerging markets crisis in 1997, could exaggerate that problem if Asian policymakers are forced into pushing interest rates ever lower toward western levels just to keep their exporters competitive with Japan's.
While the circumstances in many emerging markets are much different to 1997 - fewer currency pegs, better balance of payments accounts and much higher foreign cash reserves - the scale of foreign investment flows is much higher, too.
"The amount of capital that has come to these countries is substantially larger now, so you have a lot more kindling than before and all it needs is a spark," said Jen, adding the most likely trigger was still set to be as much the winding down of U.S. money printing than the start of Japan's.
"That makes the risk of a repeat of 1997/98 difficult to dismiss."