Today's unexpectedly strong nonfarm payroll report didn't just send the dollar soaring — it also made the British and Japanese economies look worse by comparison, creating more headwinds for the pound and the yen.
But if you think those currencies have fallen as far as they can, Steven Englander has something to say about that.
Englander, global head of G10 FX strategy for Citigroup, has analyzed the effect of the weakening yen and pound on exports. He said that while British and Japanese policymakers believe that a weaker currency will stimulate their stagnating economies, in large part because exports will increase, "investors simultaneously underestimate how much depreciation they need to generate such a recovery and overestimate the impact on trading partners. As a consequence investors underestimate how far their currencies will have to fall to move the needle on growth."
Consider Japan. You might think that the weakening yen has enabled Japanese manufacturers to sharply increase sales to other Asian countries - but you would be wrong, according to Englander.
"Japan's exports are now less than 20 percent of major Asian trading partners," down sharply from even ten years ago, Englander said. That means the weaker yen has less of an impact. In fact, Englander estimates that the impact of this latest round of yen weakness is at least 30 percent less than the pervious one: "a JPY drop just is not what it used to be in terms of impact on the rest of Asia." The same principle holds true for Britain, he says.
If a monetary policy isn't having the desired effect, policymakers may well change course. But Englander isn't expecting that now.
When a policy tool "is the only tool you have among other ineffective tools, you use more (think of the Fed and QE). So if you believe the comments of UK and Japanese policymakers on how they intend to grow out of their current slump, you have to think that this currency depreciation episode will be acute and prolonged," he said.
To be continued.