The Currency Wars Heat Up

According to Investopedia a currency war ‘refers to a situation where a number of nations seek to deliberately depreciate the value of their domestic currencies in order to stimulate their economies. Although currency depreciation or devaluation is a common occurrence in the foreign exchange market, the hallmark of a currency war is the significant number of nations that may be simultaneously engaged in attempts to devalue their currency at the same time.

It adds that most countries have a floating exchange rate determined by the market. So a nation has two options if they want to devalue their coin. One, get the central bank to decrease the value of the currency by reducing interest rates. The other is quantitative easing — printing money — to keep the currency’s value low.

Investopedia then says that ‘currency war’ is a threatening term. Perhaps ‘competitive devaluation’ is more polite.

That’s the wording the G20 members used on their most recent statement. As the September shindig wrapped two weeks ago, they promised no more currency wars. The statement said G20 nations will ‘refrain from competitive devaluations and resists all forms of protectionism. We reiterate our commitment to move toward more market-determined exchange rate systems and exchange rate flexibility…and avoid persistent exchange rate misalignments.

There you have it. They promised, so it won’t happen.

I wouldn’t believe them though.

ABC’s The Business hit up Jim Rickards about this last week. When asked what he thought of the G20’s commitment to end currency wars, Jim said, ‘They [G20 nations] don’t have a lot of credibility. They’ve issued these statements in the past and it doesn’t do anything at all.

Jim added that no country in their right mind would come out and say they support a currency war. Yet currency wars happen anyway.

Shortly after, Jim explained how countries are doing everything they can to cheapen their currency. The RBA’s May rate cut was an example. As was China recently breaking its de-facto peg to the US dollar in early August. Jim anticipates they’ll devalue their currency again soon.

Not long after China cheapened their currency, Vietnam loosened the dong’s trading band by 1%. Kazakhstan dropped any currency limits it had in place, sending the tenge one third lower in a day.

The thing is, no one really cares much about the tenge or the dong.

Systemic collapse is a possibility

What many people do care about, however, is the US dollar. More specifically, what the Fed does next.

And last week, the Fed did nothing.

Actually, the Fed’s done nothing for over 3,370 days. In that time they’ve talked about the interest rate. But there’s been no rate increase for that entire period.

Even though the economic data didn’t support a rate raise, the Fed has kept the US dollar weak.

But the longer the Fed force the US dollar down, the more other countries join in by weakening their own currencies.

The way Jim sees it, we are now in our fifth year of a currency war. And it’s showing no sign of slowing down yet either.

As Jim recently wrote in Markets and Money over in the US:

In the ongoing currency war that began in 2010, the major powers are the U.S., China, Japan, and the eurozone. 

In 2010, the story was the weak Chinese yuan. In 2011, it was a weak U.S. dollar. A weak yen policy emerged from Japan in late 2012 with Abenomics. That was the story of 2013. By 2014, Europe needed help and we saw the euro weaken appreciably from mid-2014 until the start of eurozone QE by the European Central Bank in early 2015.

Now, in late 2015, we’re back to the weak yuan again.

Along with these major powers comes a long list of minor powers that also participate in the currency wars. These include developed countries such as the U.K., Switzerland, Australia, and Canada that get caught in the crossfire and have to adjust their foreign exchange and interest rate policies in order not to be disadvantaged by what the big players are doing.

Australia and Canada have been busy slashing rates and cheapening the Australian dollar and the Canadian dollar, (affectionately known as the ‘Loonie’) to record low levels. This will do nothing to help stimulate their economies, but it will produce inflation. This is already beginning to show up in asset bubbles in real estate. Consumer price inflation due to the higher cost of imports will not be far behind.

Currency wars have no logical conclusion until there is either systemic reform or systemic collapse. Right now, no serious effort at reform is underway. Systemic collapse remains a possibility.

Jim and I are working on a new project to help you better understand how currency wars affect your portfolio. Expect to see that in the weeks ahead.

Shae Russell

Editor, Strategic Intelligence

From the Port Phillip Publishing Library

Special Report: The End of Australia Vern Gowdie’s new book is called The End of Australia: The Real Story Behind Australia’s Economic Collapse and What You Can do to Survive It. We are mailing free copies of this book to anyone who requests one online. It does not make for cheerful reading. But the idea is that you’ll be safer (and much wealthier) in 10 years’ time from receiving a more sober and realistic analysis of what’s going on…what happens next…and what you should be doing about it now… (more)

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Since starting out in the financial markets over a decade ago, Shae has extensive experience across various aspects of the industry. Shae cut her teeth in the derivatives industry, teaching clients basic trading techniques with technical analysis. Joining Port Phillip Publishing eight years ago, Shae has worked across a number of publications, such as Australian Small-Cap Investigator, Gold Stock Trader and Microcap Trader. She’s spent the past two years however, honing her macro analysis skills alongside Jim Rickards, showing Australians how to invest and profit form global macro trends. Drawing on her extensive experience, Shae is a contributor to Money Morning, and lead editor of sister-publication Markets & Money, where she looks at broad macro trends developing around the world, combining them with her distaste for central banks and irrational love of all things bullion.

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