It is a relatively quiet period for news flow. Here are some observations from today:
– The DPJ has said that it will back Mr. Kuroda but reserves the right to challenge his nomination when it comes up for renewal in April — because his appointment at this time is apparently just for the end of Mr. Shirakawa’s term! The party has also said that it will not back Mr. Iwata. It may still be possible for all three nominees to make it through the upper house, and Nomura (as reported by Alphaville) expects this to happen; but it seems that Mr. Iwata will have to rely on the support of small parties, not all of whom back Mr. Nakaso (scope for some manoeuvring there?). It is not clear whether the DPJ will whip its lawmakers or not.
– Bloomberg reports some chatter about a Grand Coalition in Germany after the next election, something that is on the cards because of the weakness of the FDP. The interesting thing was an observation that the CDU is effectively in a Grand Coalition already, because the SPD is dominant in the Bundesrat.
– Mr. Hollande has said what his ministers had been saying for some time: that France will not meet its deficit target this year. His estimate for 2013 was 3.7%, the same as the recent EC forecast. I think it would be a mistake to see this as a rowing-back from the austerity consensus: that consensus is determined by Germany’s attitude, and national politicians are merely attempting to soften the blow in the short term.
– Mr. Jordan of the SNB has reaffirmed his committee’s determination to maintain the currency cap, according to Bloomberg.
So, what about GBP/USD? GBP has fallen as expectations for further monetary action have grown — as shown by the simultaneous increase in UK inflation expectations, which are still rising. I have been wondering when it will be time to declare that this move has gone far enough, and buy GBP. It is very hard to say how high UK inflation expectations ought to be, and breakevens are still rising; it will be necessary, therefore, to wait for some change or other that would logically reduce inflation expectations from their elevated levels, and to see breakevens rolling over, before buying GBP. As always with currencies, the question will then be: to buy GBP against what? USD seems the obvious choice, as the relationship between GBP and USD appears comprehensible at present — driven by real interest rates — although empirically this relationship has only held strongly for about a year, and one would have to have a good argument that the differential had got wide enough. More work needed here I feel.
On the subject of currencies, the FT has a piece about how the conditions are set for a USD bull run. As usual, no model of the behaviour of USD is presented, just the usual disorganised bag of factors. I am inclined to see the recent strength of USD as being partly about flows out of JPY into USD, and partly about the movements of other currencies: EUR has weakened as 2Y real rates have come off (after an upward run); GBP has weakened with rising inflation expectations; JPY has dropped like a stone because of Mr. Abe’s actions (to repeat myself: it is Mr. Abe who has successfully loosened Japanese monetary conditions); AUD has dropped for no reason that I can fathom, although I wonder whether its behaviour has been related to portfolio reallocation by Japanese actors. On account of the weakness of other currencies, USD emerges as the strong currency. To quote Andrew Hunt, the currency that goes up is analogous to the best horse in the glue factory.