FX Monetary Policies
So “currency wars” are all the rage, at least judging by media headlines. But I think it is worth to give a more careful look at facts in order to better understand if a real war is in place. And especially if it could be a real threat to the global economy.
It’s difficult to even explain what a currency war is, since proponents of the term seem confused themselves, but the basic idea is that central banks and governments are manipulating monetary and fiscal policies to weaken or strengthen the value of their currencies.
Large FX moves are only one part of a broader asset market story
Tere is no doubt that there have been significant moves in key FX crosses over the past few months. Since the start of October, the JPY has depreciated by more than 20% (Chart 1) and, since the start of the year, the GBP has lost almost 10% both versus USD and EUR. Te CHF itself, at a certain stage, has depreciated few percentage points, which is notable compared with recent negligible volatility, moving away from the SNB imposed floor at 1.20, which is itself oſten singled out as a by-product of the currency war. Te fact that stock markets in Japan, the UK and Switzerland are also some of the best performing markets year- to-date gives credence to the notion that weaker currencies are boosting potential economic performance and equity markets in these countries at the expense of trading partners.
44 FX TRADER MAGAZINE April - June 2013
Chart 1 – USDJPY flying since last October
Tere is certainly a grain of truth in this notion since the correlation between FX moves and equity index performance over the past few months is one of the highest on record. It could also be noted that Korean equities are among the worst performers year-to- date which could easily relates to the fact that companies in this country are some of the closest competitors to Japanese firms.
But the moves in the currencies and headline stock market indices are not the entire story. If we look across markets to rates, inflation and equity sectors it could be argued that what is actually being priced is a broader monetary easing, which is also causing currency weakness and equity strength.
Declining Real Rates
Real interest rates have declined significantly in Japan and in the UK recently. In Japan real rates – measured as the difference between nominal 10-year yields and 10-year inflation swaps – have fallen from about +0.5%
at the start of October 2012 to well in negative territory currently. It is the first time since Japan entered its 20 years long liquidity trap that some kind of serious repricing of future price level is happening.
In the UK, while real rates were already negative, they have declined further. Real mortgage fixed rates have also been declining in the UK over this period as the ‘Funding for Lending’ policy appears to have gained traction, at least in the residential secured lending market. Te absence of a liquid inflation market in Switzerland makes it harder to gain a sense of shiſts in real rates directly, but here too there has been a modest steepening in nominal curves, consistent with a bout of monetary easing.
Equity Sectors
A recent research from Goldman Sachs is also quite insightful in better understanding which way the cause- effect link of weaker currency/easier monetary stance/rallying equity markets should be interpreted. If
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52 |
Page 53 |
Page 54 |
Page 55 |
Page 56 |
Page 57 |
Page 58 |
Page 59 |
Page 60 |
Page 61 |
Page 62 |
Page 63 |
Page 64 |
Page 65 |
Page 66 |
Page 67 |
Page 68 |
Page 69 |
Page 70 |
Page 71 |
Page 72 |
Page 73 |
Page 74 |
Page 75 |
Page 76 |
Page 77 |
Page 78 |
Page 79 |
Page 80 |
Page 81 |
Page 82 |
Page 83 |
Page 84 |
Page 85 |
Page 86 |
Page 87 |
Page 88 |
Page 89 |
Page 90 |
Page 91 |
Page 92 |
Page 93 |
Page 94