Currency wars are either everywhere or nowhere. We know that much.
What we also probably know is that currency devaluations in today’s environment are indeed approaching beggar thy neighbour policy without commitments to be irresponsible and/ or supportive fiscal action. Read more
Fair enough if you want to talk about QE and devaluation but the recently released FOMC minutes really don’t seem to be the place to start building your argument for a Fed jumping into the currency wars.
Bringing us the opposite view, here’s some Bloomberg: Read more
A guest post from Barry Eichengreen, a professor of economics and political science at the University of California, Berkeley and author, most recently, of Hall of Mirrors: The Great Depression, the Great Recession, and the Uses — and Misuses — of History.
Economic analysis, it seems, is the art of recycling old ideas under new names. So it is with the debate over currency wars, which parallels exactly the 1930s debate over competitive currency devaluation. David Woo, meet Ragnar Nurkse.
Nurkse, in his 1944 classic, International Currency Experience, argued that reflationary policies following the collapse of the 1920s-era gold standard operated by depreciating the exchange rate. Countries that pushed down their exchange rates had the greatest success at preventing further falls in prices and output, insofar as they substituted external demand, in the form of additional net exports, for deficient demand at home.
But the policy was beggar thy neighbour. Read more
Boom. BANG! Crunch. CRACK.
That’s the sound of the world’s fixed currency systems buckling under the pressure of a new dollar paradigm. Today’s edition: Saudi Arabia’s riyal.
The last time the riyal’s peg with the dollar came under any significant stress, of course, was back in 2008. And we know what the problem was back then (hint: not enough dollars).
So the following chart by way of Standard Chartered on Friday is probably worth a minute or two your time:
Always beware FX analysts declaiming “the dawn of a new era” — particularly one that suggests “we are all FX traders now” — but BofAML’s David Woo may be somewhat justified here:
There is a growing consensus in the market that an unspoken currency war has broken out. For many countries facing zero interest rates and binding fiscal constraints, the only policy tool left at their disposal to stimulate growth is a weaker exchange rate…
Nevertheless, it would seem that policymakers are becoming more open and ready to avail themselves of this last resort. This includes even those of some large and closed economies that are generally thought not to benefit as much from weaker exchange rates as small and open ones. This is not totally surprising given currency devaluation, unlike structural reforms that can also increase competitiveness, is relatively painless and easier to do politically…
Of course, respectable central bankers would still insist that currency depreciation is a consequence of their monetary easing rather than a goal in itself. However, evidence suggests otherwise…
Pretty obviously — with ECB QE, a presumed resultant euro funded carry trade, and all sorts of central banks rushing to cut rates — there’s some sort of renewed currency war movement going on.
And while we’re all ears for arguments about positive-sum outcomes (in a deflationary world), it’s worth remembering those who might struggle to get involved. Read more
The first rule of currency wars is: you always talk about currency wars.
The second rule is: you can always find one to talk about if you look hard enough.
This month’s FX war location of choice is Asia, and here with its proximate cause is BNP Paribas (our emphasis): Read more
UK chancellor George Osborne announced on Monday that the Bank of England will initiate a scheme to help support export finance for UK exporters.
This, as the BoE explains on its website, will see the Bank accept UK Export Finance-guaranteed debt capital market notes as collateral for liquidity operations, encouraging (it is hoped) banks to make export-finance related loans to industry. So, similar to funding for lending, but on this occasion specifically lending to export businesses. Read more
That’s the new black according to Citi’s Steven Englander:
Since May 1 the median increase in 10-year local bond yields in 47 major EM and developed markets (DM) is 39bps (Figure 1). Among major EM economies (light blue) it is 83bps; among major DM (dark blue) economies it is 29bps. The US 10-year Treasury yield increase (red) is only at the median of developed economies and well below the overall median. In both EM and developed economies, the fat tail of rate increases is to the upside, so average increases are even higher. The paradox is that the run-up in US interest rates, which is arguably the primary driver of these global rate increases, is well below the average and median globally.
Bank of Korea has done its bit to stoke the currency wars…
Although they insist that it’s not. From BAML’s Jaewoo Lee:
In the press interview, the Governor cited a few main changes since April which led the BoK to cut in May rather than in April: the supplementary budget was finalized; many central banks, including the ECB, turned to easing mode; and the easing can help further with improving sentiments. The Governor, on the other hand, stated that today’s decision was not a response to the yen weakness, contrary to the often-voiced speculation.
Strong currencies are the bane of every triple-A rated, QE-less economy in currency war-torn 2013, it seems. It’s become an increasingly irksome point in Australia, where the initial exuberance over cheap foreign holidays has been slowly replaced by worries that it’s squeezing the non-mining sectors.
An FOI request by Bloomberg yielded a bunch of documents from the Reserve Bank of Australia about the currency’s overvaluation problem. Specifically, how bad it is and who’s to blame. Well, who among other central banks*, at least. Here’s list of the definitely-implicated: Read more
The currency war meme rumbles on as the G7 does its very best to avoid a coherent message amid arguments about whether drawing a distinction between “domestic objectives” that weaken a currency and just plain weakening it actually matters. Ho hum. Read more
A predictable response to the utter confusion around yesterday’s G7 statement:
You gotta roll with fashion:
We have Weidmann worrying the currency wars are kicking off again with Japan leading the way and a whole host of others either joining in and/ or complaining hypocritically. Read more
There’s basically nothing happening. Sure we’ve got plenty of rhetoric, a Swiss franc floor and QE — but FX volatility is touching recent lows:
Currency wars are back in fashion. Even if you ignore the idea that those who fire the opening shots do so as an after-thought, there is still a feeling this may tip into widespread conflict.
But, the idea of currency wars as a negative may be fundamentally misunderstood (we blame the ‘war’ branding thing). Read more
Japan’s finance minister Jun Azumi was pretty clear about how the country might respond after the FOMC’s decision last week threatened to push the yen higher against the dollar. Today the BoJ made good on the threat, announcing it would increase its asset-purchasing programme to ¥80 trillion ($1.01tn) from ¥70tn.
The yen did this: Read more
QE3 has set the dogs of FX verbal intervention loose (well, looser anyway) and it seems probable some actual shots may be fired in the coming while.
Bank of New York Mellon’s alliterative Neil Mellor pointed to Brazil, where the central bank was the first to pass comment on the Fed’s move (with our emphasis): Read more
China’s foreign ministry said it “adamantly opposes” a bill being pushed by the Senate to allow the United States to impose duties on countries that undervalue their currencies, Reuters reports. In a statement posted on China’s official government website on Tuesday, foreign ministry spokesman Ma Zhaoxu warned the United States not to “politicise” currency issues, and said the US was using currency as an excuse to adopt protectionist trade measures that violated global trading rules. ”By using the excuse of a so-called ‘currency imbalance’, this will escalate the exchange rate issue, adopting a protectionist measure that gravely violates WTO rules and seriously upsets Sino-US trade and economic relations,” he said. “China expresses its adamant opposition to this.”
The US Senate is set to vote next week on legislation to punish China for manipulating its currency, as the renewed threat of global recession raises tension over exchange rates, reports the FT. Harry Reid, Democratic leader of the Senate, said this week he would invoke “cloture” – a procedure to prevent delay – for senators to vote on a bill that would require the US to use estimates of currency undervaluation when calculating anti-subsidy import tariffs. The bill is subject to amendment, meaning that it could end up with so many additions it becomes in effect impossible to move forward, but experts in trade policy said it had a good chance of passing.
Crossing the Reuters tape a little while ago, it seems members of the G20 have learned to play nice(r) since their last meeting in November:
G20 CONSENSUS REACHED ON CAPITAL CONTROLS AND EXPANSION OF IMF CURRENCY BASKET FOR SPECIAL DRAWING RIGHTS
One by one, the countries of the emerging world are loosening the shackles with which they tried to prevent their currencies from appreciating, the FT writes. It is not that they care less about export competitiveness than they did even a few weeks ago. It’s that they now care more, much more, about inflation. And with rising prices of commodities, especially food and oil, stoking inflation, officials are deciding that allowing a currency to appreciate is a good way to relieve the pressure. The latest to move is Chile, which late on Tuesday raised interest rates by 0.5 percentage points for the second month running, and signalled that they could go higher – above the current 4.25 per cent – in coming months. Since the move had been expected, the Chilean peso rose only marginally on Wednesday against the US dollar, but at 472.80 it now stands 3 per cent higher than a month ago and 5.5 per cent higher than on January 1. Earlier in the week, the South Korean authorities confirmed that they too were betting on currency appreciation to stem rising inflation (4.7 per cent in March). The central bank left interest rates unchanged, but did so only after the government eased up on earlier efforts to limit the won’s rise. The South Korean currency is now at 1,085 to the US dollar, 4.5 per cent higher in a month. Last week, in the biggest surprise of all, Brazil retreated in its gruelling fight to limit the real’s appreciation. The authorities did nothing to prevent traders pushing the currency through the psychologically important R$1.60 to the dollar level, and the real now stands at R$1.58, about 6.5 per cent higher than in mid-March.
Brazil has stepped up its “currency war”, a day after the International Monetary Fund tacitly endorsed the use of capital controls, with the announcement of the fourth set of measures within a month to help control its exchange rate, the FT reports. Guido Mantega, the finance minister, said the government would extend a 6 per cent tax on repatriated foreign borrowings to loans or bonds with a maturity of up to 720 days, compared with the previous limit of up to 360 days. “The government has to take action to avoid any type of excesses,” said Mr Mantega. The IMF proposed its first guidelines this week on the use of measures to control inflows of speculative capital, in a move seen as legitimising a tool it had once staunchly opposed. Brazil has been fighting to keep its currency, the real, trading at about 1.65 to the US dollar – a level that is almost 40 per cent higher than two years ago. But in recent weeks, the currency has strengthened further.
Brazil’s central bank raised interest rates by 50 basis points in the second such move this year as it seeks to curb rising inflation, the FT reports. New central bank head Alexandre Tombini boosted the benchmark Selic rate to 11.75 per cent on Wednesday night as he seeks to balance rising inflation against a strong currency. “The Copom (monetary policy committee), decided unanimously to raise the Selic rate,” the central bank said, without elaborating. Brazil’s economy is expected to have grown about 7.5 per cent in 2010 and is on track for further expansion this year on the back of rising consumer credit and investment. The government is expected to release fourth-quarter gross domestic data on Thursday. The rapid growth has also rekindled inflation and attracted foreign investment inflows that have strengthened the Brazil’s currency, the real. At 6.08 per cent in the 12 months to mid-February, inflation is above the central bank’s target of 4.5 per cent, plus or minus 2 per cent.
The US is pushing Brazil to form a united front against China’s allegedly undervalued currency, as Latin America’s largest economy struggles with a flood of cheap Chinese goods and a surging Brazilian real, reports the FT. Tim Geithner, US Treasury secretary, visited Brazil on Monday to prepare for a G20 meeting later this month and a planned visit by Barack Obama, US president, expected in March. In a clear reference to China, Geithner was set to say in a speech that capital inflows to Brazil have been magnified by attempts by other emerging economies to sustain undervalued currencies with tightly controlled exchange rate regimes. Any alignment with the US on the issue of China’s currency would mark a fundamental shift for Brazil, which has pursued a trade policy angled towards a grand “south-south” alliance among developing countries. The Telegraph notes Geithner’s visit comes as the US Treasury steps up calls for China to allow its currency to strengthen, while the WSJ says Brazilian officials privately say that Brazil and the US “may speak with a common voice” on the currency issue at the G20 meeting.
The US is attempting to enlist Brazil in a united front against China’s allegedly undervalued currency, as Latin America’s largest economy struggles with a flood of cheap Chinese goods and a surging Brazilian real, reports the FT. Tim Geithner, US Treasury secretary, visited São Paulo and Brasília on Monday to lay the groundwork for the move ahead of a meeting of the Group of 20 nations this month and a planned visit by Barack Obama, US president, to Brazil, which is expected in March. “Brazil is seeing a surge in capital inflows,” Mr Geithner said in prepared remarks for a speech at a São Paulo business school. “These flows have been magnified by the policies of other emerging economies that are trying to sustain undervalued currencies with tightly controlled exchange rate regimes.”
America, an apology: perhaps we were too quick to worry about the 47 per cent of you that believe China is the world’s foremost economic power.
They may have read this cogent post from Peterson’s Arvind Subramanian, which crunches updated purchasing power parity (PPP) estimates and finds: Read more
China needs to reduce unfair subsidies and stop the theft of intellectual property as well as letting its currency appreciate, Tim Geithner, US Treasury secretary, said on Wednesday. In a speech ahead of next week’s visit to Washington by Hu Jintao, Chinese president, Mr Geithner widened the range of US concerns with Beijing’s economic policy well beyond the currency that has been a focus of Capitol Hill’s anger, and said the economic future of the US was in its own hands, reports the FT. China needed to promote fair competition with the US and other trade partners by reducing implicit subsidies from low-cost finance, land and energy, and clamp down harder on the theft of intellectual property from foreign companies.
Brazil has warned that the world is on course for a full-blown “trade war” as it stepped up its rhetoric against exchange rate manipulation, the FT says. Brazil’s finance minister told the FT that the country was preparing new measures to prevent further appreciation of its currency, the real, and would raise the issue of exchange-rate manipulation at the WTO and other global bodies. He said the US and China were among the worst offenders. Meanwhile, MarketWatch reports that China’s trade surplus was 40% smaller than expected in December — potentially easing some China-US trade tensions ahead of a state visit by Hu Jintao later this month.