Will the Trans-Pacific Partnership end currency wars in the region?
In a first for countries setting up a free trade deal, the dozen involved in the Trans-Pacific Partnership (TPP) have pledged not to engage in currency wars and to consult each other over monetary policy in theory ushering in more stable exchange rates.
The countries involved in the deal are the US, Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam, accounting for 40% of global output. At least five of them have heavily traded currencies on forex markets namely, USD, AUD, CAD, JPY and NZD, but there are others with traded currencies, such as SGD and MXN.
The use of currency devaluations to gain an edge over competitors in export markets has become routine around the world and the US in particular, which has had a stronger currency in recent years is keen for these new trade privileges not to be abused.
This also places pressures on countries such as Japan not to pursue weaker currencies in a bid to stimulate their exports. In recent months, the Bank of Japan has said a lot less about the desire for a weaker JPY. The fall of JPY in recent years has created considerable regional tensions, especially with South Korea.
However, what TPP won’t do is to stop currencies naturally adjusting as they reflect differing fundamentals, which is healthy. In practice it will be difficult to define currency manipulators and there doesn’t seem to be any specific set of measures to punish them.
A country can claim that its quantitative easing programme is merely aimed at stimulating domestic demand and the accompanying devaluation and gains in export market share are just unfortunate side effects. But it’s likely to see countries pursue such policies less brazenly and at least create a forum to stop currency wars potentially escalating into trade wars.
A backdoor into the Fed’s thinking
The potentially more interesting aspect of TPP for currency traders is the agreement for participating countries to share insights on each other intensions regarding their monetary policy. This is a big breakthrough for the other members, particularly in emerging markets, who in theory can gain a deeper insight and even notice over what the Federal Reserve will do.
The more people who have access to the Fed’s thinking (providing they play ball) – and that applies to other member central banks – the more likely information is to leak out into the markets in some way. For instance this could manifest itself with TPP central banks taking pre-emptive action with their monetary policy ahead of the Fed making a move, which would provide insights for the rest of the forex market.
Also, some TPP currencies and even local bond and equity markets could start making major unexplained moves ahead of Fed FOMC announcements for example, which could be tell-tale signs on upcoming changes in US monetary policy.
The fly in the ointment with all this fine rhetoric over cooperation and consultation is whether it will be really applied in practice.
TECHNICAL ANALYSIS: USD/JPY take a breather before the next leap?
With a US rate hike in December almost looking like a dead cert following November’s strong NFP number (and providing financial markets don’t go into a tail spin in the meantime) talk of diverging monetary policies, between the US and the rest seems perfectly valid.
An area of contrast is between the US and Japan with the latter still engaged in a huge quantitative easing programme. Indeed, the divergence has been well reflected in the charts where USD/JPY rallied from around 118.00 in mid-October and peaked at just over 123.00 in early November.
At the moment there appears to be a second consolidation in this latest trend, the first one having taken place in late October. The latest upside move was accompanied by the daily RSI moving slightly into overbought territory. Also, the recent pull-back has so far been accompanied by relatively shallow daily falls, which is potentially bullish.
Confirmation that this uptrend is intact would require seeing USD/JPY take-out 123.60 with brave traders contemplating levels of 123.25 to go long on. The targets for an upside move would likely be 124.45, 124.90, 125.28 and ultimately 125.86. On the downside, traders need to watch out for support at 121.75 and if 121.47 is breached, taking the pair back to the former consolidation area, then this most recent rally will look in doubt.
Though this looks like a potentially attractive uptrend it could easily be ruined by a set of disappointing economic data out of the US – and some of it has been mixed – or confusing statements from central bankers, which has also been quite common recently.
By Justin Pugsley, Markets Analyst, MahiFX