An aggressive shift in monetary policy in Japan, which caused the yen to plummet, continues to spur a repricing of global FX risk. G-20 leaders denounced currency manipulation and protectionist strategies at their meeting in Moscow last month. No country was singled out for criticism, while a realignment of exchange rates triggered by unconventional policies to stimulate output was apparently deemed acceptable. In effect, the unorthodox methods to kickstart recoveries in the US, Europe and Japan – each with monetary and fiscal policy in a bind – were reluctantly approved. However, it is difficult to establish whether a country in stagnation is using quantitative easing to specifically target a lower exchange rate. Those nations that have lost out as a consequence warn of measures to counter any perceived unfair trade advantages. The Japanese yen slid almost 20% between October 2012 and January 2013, but has settle just above ¥94.0/US$ ahead of the appointment of a new leader at the Bank of Japan. Tokyo is expected to continue its powerful blend of fiscal and monetary stimulus (dubbed ‘Abenomics’), but will nonetheless be mindful about the trade tensions it has caused and the negative implications of competitive devaluations. A further precipitous slump in the yen is therefore unlikely, certainly not at the pace we have seen in recent months. The European Central Bank, meanwhile, provided a rare douse of verbal intervention to dampen the euro in mid-February but decided against monetary loosening last week, due to lingering concerns about inflation. The chances of a rate cut have risen, though, following the difficult election outcome in Italy, which threatens to trigger fresh political and economic instability. An upturn in the US economy has led to speculation that the Federal Reserve might begin an early withdrawal of its stimulus program.
This month’s special survey focuses on the extent to which exchange rate movements are influenced by a range of different factors, including relative growth, inflation differentials, the trade balance, interest rates and equity investment flows.
You can download a sample of Foreign Exchange Consensus Forecasts at www.consensuseconomics.com.