Forex
G7 reaffirms warning against excess currency volatility in nod to Japan
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By Leika Kihara
STRESA, Italy (Reuters) -Finance leaders of the Group of Seven (G7) advanced nations on Saturday reaffirmed their commitment to warn against excessively volatile currency moves, language Japan sees as a green light to intervene in the market to arrest rapid falls in the yen.
The agreement followed new verbal warnings from Japan’s top currency diplomat Masato Kanda, who told reporters on Friday that Tokyo was ready to step into the market “any time” to counter speculative yen moves that hurt the economy.
“We reaffirm our May 2017 exchange rate commitments,” the G7 ministers said in a statement on Saturday after their meeting in Stresa, Italy, in a nod to Japan’s call on the group to reiterate its view on the need for currency market stability.
The G7 group has a long-standing agreement that excessive volatility and disorderly currency moves are undesirable, and that countries have authority to take action in the market when exchange rates become too volatile.
Tokyo has argued this agreement gives it freedom to intervene in the currency market to counter excessive yen moves.
“We’re grateful the G7 reaffirmed its shared understanding on exchange rates. It’s also reassuring for markets,” Kanda told reporters on Saturday after the finance leaders’ meeting.
The G7 language on exchange-rate commitment was unchanged from the group’s previous statement issued on April 17, when the finance leaders met in Washington on the sidelines of the International Monetary Fund meetings.
Two weeks after the April G7 meeting, Japan is believed to have intervened in the currency market to prop up the yen to arrest what authorities described as excessive, speculative currency moves.
While this kept the yen from falling below the psychologically important 160-to-the-dollar line, the Japanese currency has yet to stage a clear rebound. It stood at 156.98 to the dollar on Friday, not far from the more than three-week low of 157.19 touched on Thursday.
There is also uncertainty on whether the G7 countries will tolerate further forays by Japan into the exchange-rate market.
Speaking in Stresa, U.S. Treasury Secretary Janet Yellen said on Thursday that currency interventions should not be a “routine” tool to address imbalances and should be used only rarely and in a well-communicated way.
The finance leaders’ communique of May 2017, which was reaffirmed on Saturday, said “excess volatility and disorderly movements in exchange rates can have adverse implications for economic and financial stability”.
But it also called for exchange rates to be determined by markets, and that members “consult closely in regard to actions in foreign exchange markets.”
Kanda, who oversees Japan’s currency policy as vice finance minister for international affairs, said on Saturday he was in “extremely close contact” with his U.S. counterparts on a daily basis including on markets.
The yen has lost 11% against the dollar this year on expectations the U.S. Federal Reserve will be in no rush to cut interest rates, which would keep a wide divergence between U.S. rates and Japan’s ultra-low rates.
Markets are focusing on whether Japan will intervene again to arrest a stubbornly weak yen, which has become a headache for policymakers as it hits consumption by inflating the cost of raw material imports.
Forex
Major Russian lenders say yuan coffers empty, urge central bank action
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By Elena Fabrichnaya
MOSCOW (Reuters) – Major Russian banks have called on the central bank to take action to counter a yuan liquidity deficit, which has led to the rouble tumbling to its lowest level since April against the Chinese currency and driven yuan swap rates into triple digits.
The rouble fell by almost 5% against the yuan on Sept. 4 on the Moscow Stock Exchange (MOEX) after the finance ministry’s plans for forex interventions implied that the central bank’s daily yuan sales would plunge in the coming month to the equivalent of $200 million.
The central bank had been selling $7.3 billion worth of yuan per day during the past month. The plunge coincided with oil giant Rosneft’s 15 billion yuan bond placement, which also sapped liquidity from the market.
“We cannot lend in yuan because we have nothing to cover our foreign currency positions with,” said Sberbank CEO German Gref, stressing that the central bank needed to participate more actively in the market.
The yuan has become the most traded foreign currency on MOEX after Western sanctions halted exchange trade in dollars and euros, with many banks developing yuan-denominated products for their clients.
Yuan liquidity is mainly provided by the central bank through daily sales and one-day yuan swaps, as well as through currency sales by exporting companies.
Chinese banks in Russia, meanwhile, are avoiding currency trading for fear of secondary Western sanctions.
At the start of September, banks raised a record 35 billion yuan from the central bank through its one-day swaps.
“I think the central bank can do something. They hopefully understand the need to increase the liquidity offer through swaps,” said Andrei Kostin, CEO of second-largest lender VTB, stressing that exporters should sell more yuan as well.
The acute yuan shortage also follows months of delays in payments for trade with Russia by Chinese banks, which have grown wary of dealing with Russia after U.S. threats of secondary Western sanctions. These problems culminated in August in billions of yuan being stuck in limbo.
Russia and China have been discussing a joint system for bilateral payments, but no breakthrough is in sight. VTB’s Kostin said that since Russia’s trade with China was balanced, establishing a clearing mechanism for payments in national currencies should not be a problem.
Forex
Bank of America sees more downside for the dollar
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Investing,com – The US dollar has stabilized after a sharp fall in August, but Bank of America Securities sees more troubles ahead for the US currency.
At 07:20 ET (11:20 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% lower to 101.077, having largely held its course over the last week.
That said, the US currency is still down 1.6% over the month.
The dollar’s selloff last month stood out in a historical context, according to analysts at Bank of America Securities, in a note dated Sept. 5.
The greenback has since stabilized, however, despite the outsized weakness, the US bank still sees three reasons to stay bearish on the Dollar Index (DXY).
Following similar episodes of bearish DXY breakouts, the index has tended to continue its downtrend, the bank said.
In the last 3 analogs, DXY index fell on average for another 4% before reaching a bottom. Extending this analysis to bilateral USD/G10 pairs suggests a continuation of the USD downtrend is more likely vs EUR, GBP, and AUD than SEK, NOK, and CHF in G10.
While the DXY made a new year-to-date low in August, broad nominal and real USD trade-weighted indices have stayed at Q4 2022 levels and would suggest the USD remains overvalued.
The USD selloff in 2024 has been concentrated in and other European currencies, leading to DXY divergence from other USD indices.
The bank also noted US 10y Treasury yield’s tendency to fall after the first Federal Reserve cut, while global financial conditions are set to loosen further.
“USD may see more weakness as other central banks, particularly the ones that cut policy rates ahead of the Fed, can now afford to let the Fed do some of their work and indirectly support global economies outside of the US,” BoA added.
Forex
Dollar’s demise appears overstated – JPMorgan
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Investing.com – The US dollar has had a difficult summer, dropping substantially during the month of August, but JPMorgan thinks those predicting the demise of the U.S. currency are getting ahead of themselves.
At 06:00 ET (10:00 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% lower to 101.127, having lost 1.6% over the course of the last month.
“Diversification away from the dollar is a growing trend,” said analysts at JPMorgan, in a note dated Sept. 4, “but we find that the factors that support dollar dominance remain well-entrenched and structural in nature.”
The dollar’s role in global finance and its economic and financial stability implications are supported by deep and liquid capital markets, rule of law and predictable legal systems, commitment to a free-floating regime, and smooth functioning of the financial system for USD liquidity and institutional transparency, the bank added.
Additionally, the genuine confidence of the private sector in the dollar as a store of value seems uncontested, and the dollar remains the most widely used currency across a variety of metrics.
That said, “we are witnessing greater diversification and important shifts in cross-border transactions as a result of sanctions against Russia, China’s efforts to bolster usage of the RMB, and geoeconomic fragmentation,” JPMorgan said.
The more important and underappreciated risk, the bank added, is the increased focus on payments autonomy and the desire to develop alternative financial systems and payments mechanisms that do not rely on the US dollar.
“De-dollarization risks appear exaggerated, but cross-border flows are dramatically transforming within trading blocs and commodity markets, along with a rise in alternative financial architecture for global payments,” JPMorgan said.
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