More FX

October 26th, 2015 6:12 am | by John Jansen |

I always post the FX work of Mark Chandler from Brown Brothers Harriman. This morning there is a note in the inbox from one of his London based colleagues, Ilan Solot, who comments cogently on Argentina, Poland and BOJ policy:

Three Thoughts From London –  Uncertainty in Argentina, Victory in Poland; Odds of BOJ Easing

1/ The Argentinian presidential race will have a runoff. This came as a surprise since the latest polls suggested a high probability that the ruling party candidate, Daniel Scioli, would win in the first round by securing over 40% of votes. But with over 90% of votes counted, Scioli received only 36.7%, compared with 34.5% for the opposition candidate Mauricio Macri. The second round is the elections, to be held on November 22, are likely to be far more unpredictable. To start, Sergio Massa, who came in at third with around 21% of votes has yet declared support for either candidate. While “kingmaker” maybe an exaggeration, his roll is likely to be very influential. The result will also depend on how much traction the negative campaigns will get. Scioli, for example, consistently paints a picture of disorderly currency devaluation and cuts in social benefits under a Macri government. Either way, markets are likely to take the news positively.

2/ Poland has its first majority government since 1989. The triumph of the Law and Justice party (PiS) was expected, and the results came in accordingly. The PiS took 37.7% of votes and is projected to get 232 out of the 460 seats in parliament. The impact of the change in government is likely to be felt first on the geopolitical sphere, especially in Poland’s relations with the European Union. Recall that PiS campaigned on hardening the country’s stance against refugees. Markets were well prepared for this outcome since the surprise victory of President Duda (also from the PiS) in the in May. Furthermore, much of populist tone to the PiS campaign is likely to be just that: campaigning, with smaller direct impact on de facto policymaking.  Still, the result will increase the degree of uncertainty surrounding the country and likely dampen investor’s medium-term optimist towards Polish assets.

3/ Comments from Japanese policymakers continue to support our view that markets might be overestimating the odds of imminent action by the BOJ. A recent survey showed that some 40% of market participants expect the BOJ to ease in December, and this number is probably higher now after Draghi’s comments. Overnight, an adviser to PM Abe, Koichi Hamada, stated that they can “wait for a while” before conducting more easing as long as Japan’s labour market remains tight. Last week, another advisor, Etsuro Honda, noted that immediate additional easing by Bank of Japan is not necessary. While Hamada and Honda are probably not the most influential voice in this decision process, serves as an indicator of how little consensus there is about taking action in the near term, and where the directive for communication is at. More importantly, Deputy Finance Minister Aso has also played down the effectiveness and the trade-offs of more easing in the near term. He said that it would be hard for prices to reach 2% even if the BOJ eased now, and that there are limits to how much monetary policy can push up prices. So unless the Japanese policymakers are purposefully setting markets up for a surprise, there doesn’t seem to that much evidence pointing towards imminent easing to support this degree of market expectations.

Be Sociable, Share!

Post a Comment