What your average central bank thinks about this currency war...
Following on from my last piece on the debacle that the media call a currency war, the rage within still burns, certainly enough to espouse another several hundred words on the topic. For the sake of those who didn’t read the piece I’m referring to, here’s a quick one liner to get you up to speed: there is no currency war for the one simple reason that a war in which the combatants are colluding is, in fact, not a war at all.
Now that you’re up to speed, let’s have a look at how this might actually play out in real terms. For clarity, I will herein be referring to the “combatants” as the governors of the central banks that constitute what we know as the G7. In theory, the combatants are meant to be acting independently of their puppet masters, the finance ministers. However, as we know, in practice this is anything but the case. As such, we are in the midst of a broad macro theme. And that is, having exhausted all other methods and avenues for growth stimulation within their respective economies, these combatants have turned their attention to the last bastion of independence: currency.
Because currencies trade in pairs, it impossible to unilaterally decree that any one particular currency be devalued across the board and for any sustained period of time. After all, the trading partners of said nation will not tolerate this sort of behaviour for too long and begin to retaliate in other ways themselves. So, the collusion begins.
So, the combatants in question take it in turns to see who has the weaker currency this week, next week, etc. Once this has been decided, it simply revolves in a neat little merry-go-round scenario.
As it happens, it is currently the turn of the USD to be the stronger on the street and this plays very nicely into the hands of the Eurocrats, UK beleaguered politicians awaiting a Carney appearance in the summer, the newly nominated/appointed BoJ governors etc etc.
From a meme-like perspective (as seen through the eyes of):
Europe: With the noise of Italian elections in the air, the advent of tail risk making a reappearance and general toilet-like economic positioning, the last thing we need is a strong currency. Italian noise will resolve itself in the end, much like Greek noise did last year, but why not make hay while the sun shines and use this positive (negative) momentum to prop up ailing member economies by boosting their respective GDP? Our man Super Mario is on tap this week and after having fired his flaccid bazooka, all he can do is appear to be more dovish and factor in another rate cut - sooner rather than later. Thank you Ben, we’ll take it for now.
UK: Our economy is stuffed. We’ve tried everything and we’re none the better for it. We’ve even gone so far as getting a ring in import to head our central bank. But until the new man with a plan arrives in the summer, it certainly can’t hurt having a weaker Betty Grable. Oh and by the way, thanks for that Moody’s nudge lower in the sovereign ratings stake, that really gave the Cable the kick in the head it needed. We’ll be sure to return the favour just as soon as we can.
Japan: OK, fair enough fellas, we’re most certainly the last to argue the case here. Anything and everything you can do (well, over and above all the jawboning we’ve done for years) is truly appreciated. We also understand that this can’t go on forever, so a natural pullback/halt to the depreciation we’ve seen in the past three months is OK. But please, let’s not get too carried away and resume just as soon as we can, thanks (from whoever is running the show over here this week).
Canada: Oh ey, we doon’t really care, ey. It’s all abooot stuff that doesn’t matter to us. Just make sure the last one oooout the door flicks the light switch.
Gold bugs: OK, we’re not part of your fancy G7 club, but we still have a voice, right. We are indeed grateful that you’ve finally given us another chance to get long of more precious yellow shiny stuff, especially as we dumped a good chunk of our strategic longs into 1730/50/80 and have been waiting ever so patiently for prices around these levels to get long and in size once again.
So, there you have it folks, as much as the trend is your friend, your current best friend is the USD, so there is no point in being short of it for at least another few weeks.