Various countries want to have weaker currencies in order to boost their exports. The term “currency wars” was already coined in 2010 by Brazil’s finance minister, but has intensified since then.
An escalation in these currency wars was seen in December, and is likely to continue in January.
* This article is part of the January 2013 monthly forex report. You can download the full report by joining the newsletter in the form below.
A debate about labeling China as a currency manipulator was seen before the US presidential elections, yet many other countries are busier in debasing their currencies.
- Japan: The Japanese authorities have intervened over and over again in currency markets, with little success. Verbal intervention failed, until the recent political round. Towards the December 16th elections and also afterwards, the yen has been free-falling in huge shift of direction. PM Shinzo Abe continues to battle the strength of the yen. In addition, he hasn’t backed from his demand to pursue the 2% inflation target more actively, and he leaves the BOJ governor Shirakawa little options: comply or be replaced. Also the ambitious spending plans hurt the yen. Will the vertical plunge of the yen continue or will we see a pullback. It currently seems that any pullback will be limited. The first BOJ rate decision under the new government happens in mid-January, and will be closely watched.
- US: As mentioned earlier, the nature of the Fed’s programs is open-ended. Even if some members of the Fed want to see an easing in easing by the end of 2013, the Fed currently continues to push $85 billion of ammunition into the currency wars. The Fed has another rate decision in late January, in which it will have the chance to clarify how determined it is regarding monetary easing – we will likely see something more dovish than the meeting minutes.
- UK: The Bank of England launched one of the more aggressive QE programs when comparing to the nation’s GDP. Despite the appointment of Mark Carney to BOE Governor (which will happen in the summer), the BOE is still open to more pound printing. A triple-dip recession in the UK will justify such a move, on top of the 375 billion pounds already allocated to the Asset Purchase Facility. The BOE will likely pause in January, but this isn’t 100% certain.
- Euro-zone: The ECB never launched official QE and “lost in currency wars”, but has lent around 1 trillion euros to euro-zone banks via the LTRO program. In addition, the central bank already lowered the deposit rate to 0% and is “technically ready” to push rates to the negative zone. Such a move will certainly weaken the euro. The ECB will not easily use this option, but the gun is on the table. A cut in the interest rate cannot be ruled out.
- Switzerland: The floor of 1.20 under EUR/USD is with us since September 2011, and there’s no sign it will go anywhere, as deflation still looms over the country which attracted safe haven flows. This is an explicit participation in a currency war. If the ECB goes negative, the peg will be endangered.
- Australia: There has been some talk about “passive intervention” to weaken the Australian dollar. This is a complex topic. How can intervention be passive? Well, it’s clear that the RBA is not pleased with the high value of the Australian dollar, as the country’s economy outside the mining sector is not thriving.
- New Zealand: The big shifts in the value of the kiwi aren’t positive for New Zealand, and the central bank often complains about the strength of the NZD. It did mention an intervention as a distant option. In January’s rate decision, the RBNZ will have a chance to mention this again.
- Canada: Also in Canada, the high value of the C$ has been mentioned, but intervention is a very distant option. Will Canada also up its tone? This depends on the loonie, which didn’t strengthen that much. A move away from parity could trigger more complaints.
All in all, everybody wants a weak currency, but not everyone can get it, as currencies are relative. Without any type of international coordination, the currency wars will likely continue and be omnipresent also in January.
It’s important to note that having a strong currency also provides advantages, especially low inflation. In a world where inflation is too low, the advantages are hard to see.
A shift in currency wars is likely only when inflation picks up, and this isn’t likely anytime soon.