Always consider hidden risks
Currency War - Unintended consequences
( From Stockchart, Zero Hedge, FRED, Global Macro Investor, Mauldin Economics, Wiki, Reuters, Money News )
Quite simply, the US dollar is forming what is clearly a bearish "head & shoulders" topping pattern, and is on the verge of breaking down below neckline support. This would be a major violation, and thus would target the waterfall lows formed back in May-2011. And with volatility growing in the currency markets, then this decline could be just as quick over a couple of months. That said, one would ostensibly wonder which currency or currencies one would buy against the US dollar to take advantage of just such a move. In our opinion, the Euro and the Swiss Franc - with the Swissy being our favorite currency given her outstanding fiscal situation.
Lastly, we should point out that the US dollar decline to the May-2011 low was accompanied by increased volatility in the stock market - and a majority of this volatility resulting in a sideways trading pattern...ultimately resulting in a sharp decline into September 2011. So, caution is advised; especially given the recent euphoria.
Another way to view it, it is to consider looking at the US Trade Weighted US Dollar Index for a broader perspective ( adjusted by the weight of the value of the commercial trading partners ). ( See graph below )
The first shot across the bow came way back in 2010 when one of the first officials to mentioned the currency war was Guido Mantega, Brazil's finance minister, stepped up to a microphone in São Paulo and broke the Central Bank omerta : 'We’re in the midst of an international currency war, a general weakening of currency. This threatens us because it takes away our competitiveness,' were Mantega's exact words. Simple.Accurate. Ominous.
By publicly asserting the existence of a “currency war”, Mr Mantega has admitted what many policymakers have been saying in private: a rising number of countries are looking at a weaker exchange rate as a way to lift their economies.The politics of such an issue were immediately apparent. The proliferation of countries trying to manage their exchange rates down is alsomaking it difficult to co-ordinate the issue in global economic forums.
Now Japan has decided it needs a weaker yen, and though the move has thus far been fairly powerful, we have reached the point where the likes of other countries will step in and defend the advantage they have gained over the last twenty years. This is how it starts with Currency Wars.
The first great currency war occurred, coincidentally of course, during the Great Depression, when most countries abandoned the gold standard ; Great Britain was the first to do so. Facing speculative attacks on the pound and depleting gold reserves, in September 1931 the Bank of England ceased exchanging pound notes for gold and the pound was floated on foreign exchange markets.
The main goal by abandoning the Gold Standard was to devalue their currencies to try to lower their unemployment rates and by doing so, set a competitive advantage against their peers. As countries devalued against each other in the attempt to reinvigorate their export economies at the expense of their trading partners, nothing was really achieved except create an extreme speculative swing in short-term exchange rates.
Great Britain, Japan, and the Scandinavian countries left the gold standard in 1931. Other countries, such as Italy and the U.S., remained on the gold standard into 1932 or 1933, while a few countries in the so-called "gold bloc", led by France and including Poland, Belgium and Switzerland, stayed on the standard until 1935–1936.
According to later analysis, the earliness with which a country left the gold standard reliably predicted its economic recovery. For example, Great Britain and Scandinavia, which left the gold standard in 1931, recovered much earlier than France and Belgium, which remained on gold much longer. Countries such as China, which had a silver standard, almost avoided the depression entirely. The connection between leaving the gold standard as a strong predictor of that country's severity of its depression and the length of time of its recovery has been shown to be consistent for dozens of countries, including developing countries. This partly explains why the experience and length of the depression differed between national economies.
Read also : Money, Gold, and the Great Depression
Remarks by Governor Ben S. Bernanke
March 2, 2004
The Bretton Woods era, which ran from the end of WWII until August 15, 1971 meant that, with gold anchoring a group of semi-fixed exchange rates, competitive devaluation was more or less negated ; and, though the Plaza Accord, signed in 1985, brought about a major devaluation of the US dollar against the yen and Deutsche Mark, it necessitated the Louvre Accord two years later to halt the dollar's slide .
The Asian currency crisis of 1997 contained the seeds of an East vs. West currency conflict, but catastrophe was averted, despite the damage that was done to the US deficit and the seeds that were sown for a decade-long war of words between the US and China — all of which brings us right back to today and the currency war that is just getting going.
Japan's currency has been strengthening for two decades, while its competitors have beenhappy to sit back and let the weakening effects of that move on their own currencies continue. ( See graph below )
The Situation Now : No Skirmishes anymore, its Currency War
The Bank of Japan (BOJ)’s adoption of a massive new easing program has the Bundesbank and other central banks worried about a currency war.
Japan’s new Prime Minister Shinzo Abe has pushed his nation’s central bank to boost the moribund economy by easing more aggressively.
Read also : Abe Pulls Pin on JGB Grenade
But Bundesbank President Jens Weidmann warned Japan against politicization of monetary policy that would lead to a weaker yen in a speech Monday, even before the BOJ announced its quantitative easing strategy Tuesday.
Japan is “intervening heavily in the duties of the central banks, pressuring for a more aggressive monetary policy” that endangers the BOJ’s independence, Weidmann said, The Wall Street Journal reports.
“A consequence, whether intended or not, could lead to an increasingly politicized exchange rate. Until now, the international monetary system has come through the crisis without a race to devaluation, and I really hope that it stays that way.”
History gives reason for concern. A “beggar-thy-neighbor” policy of global currency devaluations helped spark the Great Depression that began in 1929.
Currency devaluations are tempting for central banks, which have already pushed interest rates down to historic lows without great success in reinvigorating stagnant economies.
Germany isn’t alone in its concern. A commentary from Xinhua, China’s official news agency, said, “Albeit understandable, Tokyo’s decision to crank up money printing presses is dangerous. Such a beggar-thy-neighbor practice is likely to force others to follow suit and thus push the world ever closer to currency wars.”
To be sure, this smacks quite a bit of the pot calling the kettle black, given China’s own efforts to keep its yuan from appreciating much.
Officials from other nations expressed trepidation of a global currency war well before Japan decided to ramp up its easing.
Last month, Bank of England Gov. Mervyn King said 2013 “could be a challenging year in which we will, in fact, see a number of countries trying to push down their exchange rates,” The Journal reports. “That does lead to concerns.”
An Overview of the Currency War
As we head into 2013, we find ourselves in a situation unlike any that has ever occurred in the history of global finance. The cause of the conflict lies in the failure of the chosen measure to offset a Great Recession since 2008 : wave after wave of “quantitative easing” (QE) by Central Banks to beat stagnant growth. QE was intended to funnel cheap money into national economies to boost economic activity and increase aggregate demand, thereby creating growth and jobs. But persistent QE has had an important unintended consequence. It has removed a key measure by which traders judge sovereign interest, or the ability of a country to pay its way.
It did create a lot more debt and a liquidity trap...
The ability to simplify the complexity of that situation is something only the very brightest amongst us are able to do, and one such man is Raoul Pal of the Global Macro Investor put together a very simple list which, at the time he compiled it in late December, beautifully highlighted the utter absurdity of today's Central Banking folly.
The list was split into sections that grouped the 38 countries that had negative or zero real rates, as well as the countries that either had explicit QE programs in place or were actively intervening in or verbally manipulating their currencies:
The USA side of the Equation
So the Bank of Japan move since november 2012 is pushing the Japanese Yen very quickly and had fallen dramatically against the USD - roughly -15% in the past 11-weeks. The maion goal of this is to give a competitive advantage for their exporters.
Remember, the US continues to print money via QE-4, at a rate of 85 billions $ in buying US Treasury s and MBS and trying that way to keep the US Dollar on the cheap side.
In light of this, it would be wise to consider the technical condition of the US dollar as the "race to the bottom" looks to get much more interesting in the weeks and months ahead.
Devaluation is risky. Nobody ever really wins at Currency Wars, which makes the whole thing wothless is every body trying to do it at the same time. As they gain in intensity, these monetary conflicts are threatening to throw a major spanner in the works of a world that, until recently, seemed to have been operating under the assumption that it was possible for multiple countries to all devalue their currencies simultaneously in order to inflate their massive debts away.
Currency wars bring extreme volatility in exchange rates, instability in commercial trading and political tensions that we do not need at this point.
When they finally realize that that startegy is not working, the risk is that they shift to trade war...
Read also : Slow global growth to hit trade in 2012 and 2013, WTO says
Let s the real battle begin...
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