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.
Thursday’s rate cut came despite median expectations of a hold in both the Reuters and Bloomberg surveys. Which, coming after that surprise Australian cut, makes us wonder about the point of these sorts of surveys right now.
Although perhaps events are just moving too fast for survey answers. It hasn’t been that long since the Bank of Japan’s ‘quantitative and qualitative easing’ was announced, and lower commodity prices are flowing on to prices nearly everywhere.
Those two factors (Japanese QE and commodity prices) aren’t unrelated, either — so is this another aspect of the virtuous circle of exporting deflation? Commodity prices fall, dampening inflation just about everywhere, so even central banks of emerging Asian economies have more room with to cut rates and cut their own exchange rates. It doesn’t go on forever, but for now it seems kind of neat, maybe?
On the ground of individual economies, things are not so simple.
The Bank of Korea has its own reasons to be restrained. The country’s ratio of household debt to disposable income reached an alarming level in the past couple of years, putting it in a delicate position regarding credit growth and asset prices — especially property. Meanwhile, the BOK made clear just a couple of weeks ago it was worried about deteriorating debt servicing capacity.
Let’s look at this week’s other big Asian currency war battlers, Australia and New Zealand.
The RBA cut its rates on Tuesday, citing the room afforded by new inflationary data, plus some stronger words on the exchange rate. The next day, New Zealand’s central bank declared it was intervening in its own too-strong currency. Both have their own problems with high asset prices: Australia’s central bank might sound less worried about this just now as growth has slowed, but it’s not ignoring the risk. In New Zealand, house prices are such a worry that the central bank is tightening rules on risk-weighting of mortgages and loan-to-valuation ratios.
For both, any effect was quickly offset by strong jobs data today:
And here’s the won:
Oh well. Maybe a weaker currency isn’t all it’s cracked up to be, anyway.
Related links:
Australia-New Zealand Job Gain Deepens Dilemma on Currencies – Bloomberg
On the virtuous circle of exporting deflation – FT Alphaville