Week In Review February 24th to March 1st


Week in FX Europe – EURO Wallowing In No-Man Land
The EUR received only temporary support from a surprise uptick in Spanish manufacturing data early Friday. The 17-member currency hastily lost it all when other Euro-zone activity headlines began to disappoint. For now, the dollar is back in demand despite the US sequester cloud that kicks in with automatic spending cuts later today. The overall tone in Europe’s financial markets remains subdued ever since it was announced that Euro-zone banks would sharply scale back their early repayment of funds from the ECB’s three-year lending operations next week. In total +EUR12.5b is to be repaid, a sharp drop from last week’s +EUR62.8b. Negative news flow continues to have an impact on Euro regional funding markets.

Week in FX Americas – Loonie Split Personality
The CAD currently possesses some untameable traits. Just when you think the “big”; dollar has safe haven dominance across the board, long CAD trades are back in vogue despite the negative economic headlines. It is thought that too many short CAD positions were trying to call the shots on Friday early, eventually allowing the USD to back down from its weekly highs. For a brief period, Canadian tepid economic growth and potential worries about the US sequester dragging on US growth, strengthened demand for safe-haven Canadian government bonds. However, it seems that investors extracted signs of economic resilience in the otherwise lackluster Q4 gross domestic product report and embraced the fact that the data was not any poorer, had the loonie rallying.

Week in FX Asia – Kuroda Nominated to BoJ Governor
Japanese Prime Minister Shinzo Abe nominated Asian Development Bank President Haruhiko Kuroda to lead the Bank of Japan. Kuroda has previously stated when he was in the running for the nomination that the 2 percent inflation target set by Abe was realistic and could be achieved in a 2 year timespan. Kuroda is a proponent of aggressive monetary easing, and will likely be an important ally of Prime Minister Abe in his attempts to kick-start the anemic Japanese economy Kikuo Iwata, a professor at Tokyo’s Gakushuin University and BOJ Executive Director Hiroshi Nakaso were nominated for the two deputy governor positions. Current Governor Masaaki Shirakawa and his deputies will step down on March 19.
ASIA Week in FX


  • EUR Euro-Zone Producer Price Index
  • AUD Reserve Bank of Australia Rate Decision
  • EUR Euro-Zone Retail Sales
  • AUD Gross Domestic Product
  • EUR Euro-Zone Gross Domestic Product
  • CHF Gross Domestic Product
  • CAD Bank of Canada Rate Decision
  • JPY Bank of Japan Rate Decision
  • GBP Bank of England Rate Decision
  • CNY Manufacturing PMI
  • GBP BOE Asset Purchase Target
  • EUR European Central Bank Rate Decision
  • JPY Gross Domestic Product
  • EUR European Central Bank Rate Decision
  • USD Change in Non-farm Payrolls
  • CAD Unemployment Rate

Click here for more details on the week’s activity

Antonio Fatas and Ilian Mihov on the Global Economy: Bill Gross on the Big Mac and QE


These are good days for someone who teaches macroeconomics, because it is easy to find articles that misrepresent the basic concepts we teach in class – this always motivates our students who now feel that they can make better arguments than those writing in the financial press.
Bill Gross, founder and co-chief investment of Pimco is back in the Financial Times. This time he is not trying to explain why higher interest rates are good for investment and growth, but instead he is trying to help investors make decisions on foreign exchange markets. His argument is that the traditional theories of exchange rates (Purchasing Power Parity = Big Mac Index) do not matter much today, what matters is the behavior of central banks when it comes to quantitative easing.
The first thing that is odd in the article is that he misses the connection between the different theories he discusses. Someone making an argument that quantitative easing leads to inflation and a depreciation of a currency is implicitly using Purchasing Power Parity as an argument to talk about exchange rates. That argument is standard in any macroeconomics textbook.
What is not standard and where, in my view, he is not being accurate is the way he describes quantitative easing and its implications on exchange rates. First, there is the constant reference to “money being printed”. This is wrong. Most of the increases in the monetary base (the size of the balance sheet of central banks) do not correspond to increases in the amount of currency in circulation but to increases in the deposits that commercial banks hold at the central bank (reserves). This increase in the monetary base do not always lead to an increase in the money supply or inflation. Or you can put it in a different way: the increase in liquidity is matching the demand for liquidity by the financial system. If demand and supply are balanced, prices do not change (exchange rates do not change).
When it comes to the exchange rate he cites Japan as an example where his theory is working (the Yen has depreciated because of quantitative easing). Correct, but only up to a point: it is not because the balance sheet of the central bank is increasing, it is because there is the perception that the central bank is finally committed to deliver high inflation and if this is the case, PPP tells us that a currency will get weaker.
His advice: to pick winners and losers (in terms of currencies) by looking at the size of the central bank balance sheet. Way too simplistic and possibly wrong. It sounds more as one additional attempt to criticize central banks for what they have been doing (QE). If anyone had followed that advice during the crisis years, they would have gotten their bets on currencies wrong several times (same for those who followed his earlier advice that inflation was around the corner and interest rates would increase fast).
Yes, monetary policy matters for the exchange rate because it affects all nominal variables: prices, inflation and the nominal exchange rate. But mislabeling quantitative easing as “printing money” and call it a sure bet to increase inflation in future years has proven to be wrong enough times in the last years that one would think that the argument would not be repeated again. But I should not complain, I have to teach a few more sessions on monetary policy in about three weeks, so these articles are making my search for interesting readings much easier.

Antonio Fatas and Ilian Mihov on the Global Economy: Bill Gross on the Big Mac and QE

Saxo Bank CEO Says Euro Is Doomed as Currency Woes Resurface – Bloomberg


Lars Seier Christensen, co-chief executive officer of Danish bank Saxo Bank A/S, said the euro’s recent rally is illusory and the shared currency is set to fail because the continent hasn’t supported it with a fiscal union.

“The whole thing is doomed,” Christensen said yesterday in an interview at the bank’s Dubai office. “Right now we’re in one of those fake solutions where people think that the problem is contained or being addressed, which it isn’t at all.”

Saxo Bank CEO Says Euro Is Doomed as Currency Woes Resurface – Bloomberg

Root causes of currency wars | vox


Simon J Evenett, 14 February 2013

Discussion of currency wars has broken out again in the run-up to this week’s G20 finance ministers’ meeting in Moscow. This column points to the underlying policy choices responsible for the recurring currency disputes and the feeble ex-post rationalisations for them.


Once dismissed as self-serving grandstanding by the Brazilian finance minister in 2010, claims that the world is closer to a currency war have returned. This time the proximate cause appears to be the publicly stated policies of the new Japanese government aimed at shaking off a decades-long economic malaise. Is this another flash in the pan – or are there deeper factors at work (Bordo et al 2012)?

The recurring ‘currency wars’, however, are not random, inconsequential events. Until the economies of the major trading powers recover or there is a significant shift in national policy mixes, we should expect the currency war to keep breaking out like a rash. This has important implications for the associated blame game.

The inevitability argument

There is an air of resignation – almost of inevitability – to some commentary on today’s currency war. Broken down, the argument goes like this. It starts by noting the widely shared view that one of the major lessons from the 1930s is that economic crises such as these require active monetary policy (Eichengreen 2013). Pumping liquidity into the banking system etc. is seen by many as a legitimate role of central banks during crises. In a world of relatively freely flowing capital and at a time when most large industrialised and developing countries have eschewed managed and fixed exchange-rate regimes, then national monetary policy decisions are likely to affect nominal currency values.

When interest-rate differentials and exchange-rate movements have adverse knock-on effects for trading partners, then accusations of currency war follow. While the major industrial economies remain in the doldrums, differences in timing of monetary policy easing and the like will result repeated charges of beggar-thy-neighbour policymaking and so the currency war reads like a book with many chapters. Before unpacking this chain of logic a little more, it is first worth noting that the apparent inevitability has led to the five rationalisations for the current currency war.

Five rationalisations for the currency war

Accusations that governments have engaged in a currency war have met with several robust responses. As we will see, these responses are themselves pretty revealing. They are:

1. The ‘just following orders’ defence.

This defence was put well by Philipp Hildebrand, the former head of the Swiss National Bank, in an op-ed piece in this Tuesday’s Financial Times (Hildebrand 2013). In his view, central banks haven’t declared war on trading partners. Rather they’ve sought to revive their national economies taking steps – and this is important – that are entirely consistent with their legal mandates. Of course, critics will hardly be satisfied (a) as the cross-border adverse knock-on effects of monetary easing are what they are, (b) just because something is allowed doesn’t mean it is the right thing to do and (c) that this defence demonstrates just how parochial central bank mandates are.

2. The ‘no malice’ defence.

In their statement this week the G7 implicitly proffered this defence (G7 2013). Monetary policy that does not seek to target exchange rates is fine on this view. No harm was intended, so what’s the problem? Critics will point to the adverse effects of monetary easing on trading partners and won’t be satisfied with assurances on intent.

3. The omelette defence.

The omelette defence is the ultimate acknowledgement of the inevitability argument. If “you can’t make an omelette without breaking a few eggs”, and assuming you want an omelette, then accept the fate of the eggs. Seeing their commercial interests and economic recoveries treated as such eggs is exactly what worries policymakers in emerging markets.

4. The ‘grabbing headlines’ counter-attack.

It is said that sometimes that attack is the best form of defence. In this case this amounts to arguing that those who raise currency war concerns are trying to deflect criticism away from their own policy choices. Accusations of beggar-thy-neighbour acts by trading partners are merely a smoke screen for failed domestic policies on this view. This week’s news reports suggest that the governments worried about the currency war have spread beyond the ‘usual suspects’, so not every critic may be vulnerable to this counter-attack (FT 2013).

5. The Connally defence.

The omelette defence isn’t the only hardball option available to large countries engaging in monetary easing. The fact that prior criticism doesn’t appear to have altered central bank behaviour suggests that there may be another element in their calculations. Those engaging in monetary easing and in some cases direct currency intervention (such as the Swiss) may have concluded that their trading partners either wouldn’t dare or ultimately wouldn’t care enough to retaliate or that the policy options available to harmed trading partners are so unpalatable (such as putting in place capital taxes and controls or resorting to widespread protectionism) that those options would not be implemented. This is a version of the Connally defence named after the US treasury secretary who reacted to European criticism of US economic policy in 1971 by saying: “The dollar is our currency, but your problem.” On this view, the rest of the world needs to adjust to the reality of monetary easing and live with its consequences. One might ask what assumptions are being made about foreign acquiescence and whether foreign governments see the policy choices before them in the same way – and whether they are right.

The status quo, then – which has led to repeated outbreaks of the currency war – has plenty of defenders. Were there really no alternatives?

Was the currency war inevitable?

Is it possible to design an economic recovery package that takes account of the lessons of history while doing the least possible harm – even potentially benefiting – foreign trading partners? For sure some won’t like this question, reasoning no doubt as follows: when (not if) monetary easing leads to economic recovery, the associated expansion in corporate and personal spending will increase demand for foreign goods and services – so in the long run everything will be hunky dory for trading partners, even with monetary easing. Still, the question is a good one because if there are plausible alternatives then (a) maybe the currency war was not inevitable or (b) the decisions not to pursue these policy alternatives points to underappreciated causes of the currency war.

Taking as given that the effect of monetary easing on the exchange rate will harm, at least in the short run, foreign trading partners, what other complementary measures could have been taken to limit international tensions? One such measure would have been to combine monetary easing with expansionary fiscal policy. To the extent that the latter directly or indirectly (through supply chains, the demand for commodities, parts, and components, and induced private-sector capital formation) increased demand for imports then this would have offset, possibly fully, the impact of any currency depreciation by industrialised countries. Seen in this light, no wonder trading partners were worried that currency devaluations that accompanied austerity measures (restrictive fiscal policy) in industrialised economies further harmed their commercial interests. The adoption of austerity measures from 2010 closed the door on policy measures that could have mitigated the international tensions created by go-it-alone monetary easing by in the industrialised countries.

There are other ways to bolster demand for foreign goods and services. Another road not taken in recent years was far-reaching trade and investment reforms, which would have provided a fillip to trade partners harmed by adverse currency movements. It is difficult to see how a package of extensive trade reform and monetary easing could have been received worse by trading partners than what actually came to pass. This is not the place to recount the trials and tribulations of completing the Doha Round, but it is worth noting that the unwillingness to further integrate the world markets has exacerbated today currency war.

The key question to ask if whether emerging market governments would have been so critical of quantitative easing and the like if the policy mix of the industrialised countries contained more measures that offset the harm done by easing-induced currency devaluation? Arguably not. The root causes of today’s currency war lie not just in parochial monetary policy choice but in the backlash against fiscal stimulus packages and the political unviability of trade reform in the major industrialised economies. Pointing fingers at Japan misses the point. The responsibility for this latest outbreak of parochial decision-making goes much deeper.


Bordo M, Owen F Humpage and Anna J Schwartz (2012), “Notes for currency wars: The trilemma of international finance“, VoxEU.org, 18 June.

Eichengreen, Barry. (2013). “Currency War or International Policy Coordination?” Journal of Policy Modeling, January (forthcoming).

Financial Times (2013). “Currency war fears spread across Latin America”, 13 February.

G7 (2013). “Statement by the G7 Finance Ministers and Central Bank Governors”, UK Treasury, 12 February.

Hildebrand, Philipp (2013). “No such thing as a global currency war”, Financial Times, 12 February.

Root causes of currency wars | vox

Bank of England | Publications | News Releases | News Release – G7 Statement


“We, the G7 Ministers and Governors, reaffirm our longstanding commitment to market determined exchange rates and to consult closely in regard to actions in foreign exchange markets. We reaffirm that our fiscal and monetary policies have been and will remain oriented towards meeting our respective domestic objectives using domestic instruments, and that we will not target exchange rates. We are agreed that excessive volatility and disorderly movements in exchange rates can have adverse implications for economic and financial stability. We will continue to consult closely on exchange markets and cooperate as appropriate.”

Bank of England | Publications | News Releases | News Release – G7 Statement

OANDA: Week In Review January 28th to February 1st

by Dean Popplewell


Week in FX Europe – Dollar Perception Has the EUR Appreciating
Quantitative Easing or QE has been the main driver of exchange rates and it will probably remain this way for some time. The change in the balance sheet values of the ECB and the Fed has had an extreme effect on the value of the ‘single’ currency. More importantly, the Fed and ECB actions over the past week points towards a continuation of this EUR strength.

Week in FX Americas – The Loonie Bears Had Their Wings Clipped
The loonie was supposed to weaken this week, only because everyone said so. However, the currency took off in one direction and that was higher. The bears did get a bit of a reprieve after Friday’s tepid US employment results, but at parity, there is ‘no harm no foul.’ The US jobs report now deflates fears of the Fed pulling back stimulus, supporting both equities and bonds and hurting the greenback somewhat.

Week in FX Asia – The Kiwis Gave Us “The Hobbit” And Now An Expensive “Dollar”
While the Yen is getting battered against all currencies on the grounds that the Japanese government wants that to be so, the Kiwi is rallying. Governor Wheeler at the RBNZ has been the main catalyst for this appreciation. All week the market has heard hawkish comments come from his office. On Wednesday, the RBNZ chose to leave the OCR unchanged at +2.5%. The Governor is bullish about New Zealand’s economy, saying “economic indicators are improving here and with many of our trading partners” and “positive global sentiment is resulting in lower bank funding costs and reduction of credit costs for both households and firms alike.”
ASIA Week in FX


  • AUD Reserve Bank of Australia Rate Decision
  • EUR Euro-Zone Retail Sales
  • AUD Unemployment Rate
  • EUR European Central Bank Rate Decision
  • CNY Consumer Price Index
  • EUR German Consumer Price Index
  • CAD Unemployment Rate s

February 2, 2013

The contest “01 – Y2013 Contest (MG-PT)” completed this weekend the first 5 weeks.
The first five weeks were equilibrated with a CPL slightly negative.

See details below.

Portfolio Return (MG-PT account):






01 – Y2013 Contest (MG-PT)

Statistics reflect account status as of February-03-2013 00:00


Deutsche Bank Beats Capital Adequacy Goal; Shares Rise – Bloomberg


Deutsche Bank AG (DBK), Europe’s biggest bank by assets, posted a fourth-quarter loss that exceeded estimates after the company eliminated more than 1,400 jobs and set aside 1 billion euros ($1.35 billion) for legal expenses.

The loss of 2.17 billion euros, the biggest in four years, was about eight times larger than the consensus analyst forecast. It compared with a profit of 147 million euros in the year-earlier period.

Deutsche Bank Beats Capital Adequacy Goal; Shares Rise – Bloomberg

Europe’s next challenge: A strong euro – Jan. 30, 2013


The euro rallied to a 13-month high Wednesday, as fears of a financial meltdown in Europe continue to abate, thanks in large part to the European Central Bank.

Last year, ECB president Mario Draghi pledged to do whatever it takes to preserve the currency.

More recently, the ECB said that European banks had repaid €137 billion worth of emergency loans, raising hopes the financial sector is on the mend.

“The last euro bear seems to have died on Friday,” analysts at Nomura proclaimed in a research note, saying the currency market is showing signs of “EURphoria.”

The euro is now firmly above $1.35, topping a key technical level that analysts say could pave the way to $1.40.

That’s a far cry from where it was at the height of Europe’s debt crisis last July, when it fetched about $1.20.

Europe’s next challenge: A strong euro – Jan. 30, 2013

What Investors Should Know About Foreign Exchange – TheStreet


OANDA Corporation has transformed the business of foreign exchange through an innovative approach to forex trading. The company’s leading online trading platform, fxTrade, introduced a number of firsts to the marketplace, including immediate execution; instant settlement on trades; trades of any size between one unit and 10 million units; and interest calculated by the second. The company’s many awards attest to the power and flexibility of its trading platform. In 2012, OANDA was named “Best Forex Provider” by the Financial Times and by Investors Chronicle; “Best FX Broker” by Forex Magnates; and was recognized by Investment Trends Singapore as providing “Best Value for Money” and “Highest Overall Client Satisfaction”.

OANDA was the first online provider of comprehensive currency exchange information, and today the company’s OANDA Rate® data are the benchmark rates for corporations, auditing firms, and global banks.

OANDA has six offices worldwide, in Chicago, London, Singapore, Tokyo, Toronto, and Zurich. OANDA is fully regulated by the U.S. Commodity Futures Trading Commission (CFTC), the U.S. National Futures Association (NFA), the Monetary Authority of Singapore (MAS), the Investment Industry Regulatory Organization of Canada (IIROC), the UK Financial Services Authority (FSA), and the Japanese Financial Services Agency (FSA).

What Investors Should Know About Foreign Exchange – TheStreet