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ECB, PBoC up the ante in the currency war – Rabobank

FXStreet (Barcelona) - According to Jane Foley, Senior Currency Strategist at Rabobank, the ECB and PBoC have upped the stakes in the currency war by promising to take necessary steps to keep the value of the currency low.

Key Quotes

“Even though the ECB has a policy of not making direct references to currency levels, it seems that the dovish rhetoric of Draghi is aimed at undermining the value of the EUR. Since early July EUR/USD has weakened by almost 10%, though this has been facilitated by the better tone of the USD in this period.”

“The yen has weakened even more substantially vs. the USD in this period. The timing of the BoJ’s surprise announcement of even more QE on October 31, whether an accident or cunningly engineered, coincided with the last day of the Fed’s asset purchase programme. In doing so it drew the market’s attention to the contrasting policy paths of the US and Japanese central banks. “

“The Japanese authorities may have been successful recently in providing policy stimulus via the exchange rate. However, this potential boon to Japanese competitiveness is unlikely to be welcomed by China.”

“It is against this back that the PBoC announced a surprise rate cut last week; the first in more than 2 years. In our view, China will have one eye on the CNY/JPY exchange rate and this will likely have been a contributing factor to Friday’s policy announcement. “

“Clearly the biggest loser in the developed world currency war at present is the Federal Reserve. To date, there has been very little official push back against the stronger USD. However, given that inflationary pressures are still moderate in the US, it is possible that the monetary tightening that is implied by the gains in the currency could cause the Fed to delay its first rate hike.”

“We see no Fed tightening until Dec 2015 meaning we see scope for some temporary setbacks in the USD uptrend in the months ahead. “

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