The G-20 statement was a compromise on a global level. Not only did the statement refrain from mentioning Japan and spark a USD/JPY rally, but it also allowed for wider currency wars.
The 8 important currencies are now split between those who participate in the currency wars and will see their currencies weakening, and those who don’t and will see their currencies strengthening. Here are 4 winners and 4 losers:
Let’s start with the winners – countries participating in the currency wars, and want a weaker currency:
- JPY: The pro-growth / anti-deflation policies also contain an agenda to weaken the yen, and now Japan received the green light to follow through with its policies. The recent weakening is just the beginning.
- CHF: The small and rich country is not part of the G-20, but still enjoys the communique. The floor of 1.20 under EUR/CHF just received another approval. Direct currency intervention can continue.
- USD: The United States officially has a “strong dollar” policy, but when the central bank maintains a policy of open ended Quantitative Easing (QE or dollar printing), the words are countered with the opposite policy. In addition, the date-less commitment regarding the low interest rates also weighs on the greenback.
- GBP: The United Kingdom has one of the largest QE programs in comparison with its GDP. Worsening economic conditions open the road for more QE, as officials have hinted.
And here are the losers – those who do not participate and suffer from stronger currencies:
- EUR: The euro-z0ne is suffering from a deep recession and certainly needs a weaker euro for growth. ECB president said it out loud, but the actual policy is monetary tightening: the LTROs are scaled back.
- CAD: Canadian officials may occasionally complain about the exchange rate, but with a normally hawkish stance, the higher exchange rate curbs inflation. It is hard to imagine Canada moving anywhere close to the policies of its southern neighbor anytime soon.
- AUD: In the past, there was some talk about “passive intervention” by the RBA. How can an intervention be passive? Australia isn’t expected to move in the direction of intervention. The A$ is not the strongest currency, due to domestic weakness, but is still a loser in the currency wars.
- NZD: Also New Zealand complained about the exchange rate, but its finance minister recently admitted that New Zealand cannot and will not try to devalue its currency and “will not bring a peashooter to the battleground”. NZD/USD is already at a 17 month high, and has potential to rie.
What do you think? How important are these currency wars?
Further reading: In Order to Weaken the Euro, the ECB Should Suspend the OMT