Are the currency wars still raging?

One of the features of the post credit crunch era is that economies are less able to take further economic stress. This leads us straight into today’s topic which is the movements in exchange rates and the economic effects from that. Apart from dramatic headlines which mostly concentrate on falls ( rises are less headline grabbing I guess…) the media tends to step back from this. However the central banks have been playing the game for some time as so many want the “cheap hit” of a lower currency which is an implicit reason for so much monetary easing. The ( President ) Donald was on the case a couple of months ago. From the Financial Times.

“Every other country lives on devaluation,” said Mr Trump after meeting with US motor industry executives. “You look at what China’s doing, you look at what Japan has done over the years. They play the money market, they play the devaluation market and we sit there like a bunch of dummies.”

Actually the FT was on good form here as it pointed out that perhaps there were better examples elsewhere.

South Korea has a current account surplus of nearly 8 per cent of gross domestic product, according to the International Monetary Fund, compared with just 3 per cent for China and Japan. Taiwan, meanwhile, has a colossal surplus of 15 per cent of GDP while Singapore is even higher at 19 per cent.

Care is needed here as a balance of payments surplus on its own is not the only metric and we do know that both Japan and China have had policies to weaken their currencies in recent years. So the picture is complex but I note there seems to be a lot of it in the Far East.


Ironically in a way the Japanese yen has been strengthening again and has done so by 1% over the weekend as it as headed towards 110 versus the US Dollar. So the Abenomics push from 76 was initially successful as the Yen plunged but now it is back to where it was in September 2014. Also for perspective the Yen was so strong partly as a consequence of US monetary easing. Oh what a tangled web and that.

The Bank of Japan will be ruing the rise ( in Yen terms) from 115 in the middle of this month to 110.25 as I type this because it is already struggling with this from this morning’s minutes.

The year-on-year rate of change in the consumer price index (CPI) for all items less fresh food is around 0 percent, and is expected to gradually increase toward 2 percent, due in part to the upward pressure on general prices stemming from developments in commodity prices such as crude oil prices.

Even worse for the Bank of Japan and Abenomics – but not the Japanese worker and consumer – the price of crude oil has also been falling since these minutes were composed. Time for more of what is called “bold action”?


It is not that often on these lists because the currency manipulation move by Germany came via its membership of the Euro where it added itself to weaker currencies. But its record high trade surpluses provide a strong hint and the European Central Bank has provided both negative interest-rates and a massive expansion of its balance sheet as it has tried to weaken the Euro. So we see that an exchange-rate that strengthened as the the credit crunch hit to 1.56 versus the US Dollar is now at 1.086.

So the recent bounce may annoy both the ECB and Germany but it is quite small compared to what happened before this. Putting it another way if we compare to Japan then a Euro bought 148 year in November 2014 but only 120 now.

The UK

In different circumstances the UK might recently have been labelled a currency manipulator as the Pound £ fell. As ever Baron King of Lothbury seems keen on the idea as he hopes that one day his “rebalancing” mighty actually happen outside his own personal Ivory Tower. There is food for thought for our valiant Knight of the Garter in the fact that we were at US $2.08 when her bailed out Northern Rock and correct me if I am wrong but we have indeed rebalanced since, even more towards our services sector.

However it too has seen a bounce against the US Dollar in the last fortnight or so and at US £1.256 as I type this there are various consequences from this. Firstly the edge is taken off the inflationary burst should this continue especially of we allow for the lower oil price ( down 11.2% so far this quarter according to Amanda Cooper of Reuters). That is indeed welcome or rather will be if these conditions persist. A small hint of this came at the weekend. From the BBC.

Motorists will see an acceleration in fuel price cuts over the weekend as supermarkets take up to 2p off a litre of petrol and diesel.

Not everybody welcomes this as I note my sparring partner on BBC 4’s MoneyBox Tony Yates is again calling for higher inflation (targets). He will then “rescue” you from the lower living-standards he has just created….

The overall picture for the UK remains a lower currency post EU vote and it is equivalent to a 2.5% reduction in Bank Rate for those considering the economic effect. Meanwhile if I allow for today’s rise it is pretty much unchanged in 2017 in effective or trade-weighted terms. Not something in line with the media analysis is it?

South Africa

This has featured in the currency falling zone for a while now, if you recall I looked at how cheap property had become in foreign currencies. There had been a bounce but if we bring things right up to date there has been a hiccup this morning. From the FT.

The rand plunged almost 2 per cent in less than half an hour on Monday morning after the latest row between president Jacob Zuma and his finance minister Pravin Gordhan, only moments after it had risen to its highest level since July 2015.

Perhaps the air got a bit thin up there.

The rand has been the best-performing currency in the world over the last 12 months, strengthening more than 23 per cent against the dollar, but it has suffered a number of knock backs prompted by the president and finance minister’s battles.

Back to where it was in the late summer of 2015.


If we look at the crypto-currency then there has been a lot of instability of late. At the start of this month it pushed towards US $1300 but this morning it fell to below US $940 and is US $991 as I type this. Not for widows and orphans…


There is much to consider here as we wonder if the US Dollar is merely catching its breath or whether it is perhaps a case of “buy the rumour and sell the fact”. Or perhaps facts as you can choose the election of the Donald and or a promised acceleration in the tightening of monetary policy by the US Federal Reserve. But we see an amelioration in world inflation should this persist which of course combines as it happens with a lower oil price.

So workers and consumers in many countries will welcome this new phase but the Bank of Japan will not. Maybe both Euro area workers and consumers and the ECB can as the former benefit whilst the latter can extend its monetary easing in 2017 and, ahem, over the elections. Whilst few currencies are stable these days the crypto one seems out of control right now.


20 thoughts on “Are the currency wars still raging?

  1. Hi Shaun

    I have compiled a short list of things that might be categorised as “Too Soon To Tell”, which should sit nicely alongside “Too Big To Fail”

    Brexit: It hasn’t happened yet, and the form in which it happens has yet to be decided. The outlook seems to depend more on one’s political beliefs than on any economic analysis. We may have got past the Clash stage of “Should I stay or should I go?” but apparently we are no further on than David Essex whining “Where do we go from here?” [My age may be showing here :)]

    Trump: It’s happened (much to my chagrin) but quite where it’s gonna lead us, nobody knows. (least of all Trump)

    The GFC: Our old friend the Global Financial Crisis is roughly ten-years old and is still hanging around like a bad smell, like a ten year-old Epoisses, or perhaps a Stinking Bishop. The legacy, perhaps, of our political class’s unwillingness to deliver bad news.

    Europe and the Euro: The whole European project seems to be mired in an existential crisis. Will France and Germany somehow drag things back from the bring or will Italy finally tip them over the edge?

    Different people will have different preferences for how all of the above pan out but this level and range of uncertainty seems, at least to my untutored eye, more likely to be the cause of trouble than of any form of progress.

    Perhaps the final straw will be when shrinkflation hits the popcorn market and the nation rebels as one. Or at least our man Forbin will. 😉

      • Hi Jim M

        There was an update on shrinkflation in the Guardian at the end of last week although so far nothing to make Forbin too nervous at least on the popcorn front.

        “The UK’s incredible shrinking chocolate

        A Cadbury Freddo bar is basically just one big mouthful, but its price has recently jumped 20%. This month the recommended retail price of the chocolate frogs, which weigh 18g (0.6oz), leapt from 25p to 30p.

        Mondelēz caused a furore when it revealed a new-look Toblerone with wider gaps between its distinctive triangular chunks. The ruse reduced 400g bars to 360g and 170g bars to 150g. The price did not change.

        Cadbury sparked an Easter egg hunt when a pack of six Creme Eggs was whittled down to five with only a slight decrease in the recommended retail price from £3.05 to £2.85.

        Mr Kipling has also become less generous this year, serving up eight rather than nine Angel Slices in a pack. Made by Premier Foods, the smaller packs have a recommended price of £2.25, down from £2.39.”

        The driving force in my opinion is the Global Financial Crisis accompanied by the can kicking…

  2. Hi Shaun Japan is an economic basket case is has the highest debt to GDP ratio in the world.Its demographics are horrendous in terms of old to young with no immigration.
    The Nikkei is at less than half its value of 27 years ago.
    It manages to stay economically afloat thanks to /inspite of massive currency expansion of Abenomics.
    This example suggests that economic fundamentals are irrelevant otherwise their currency would be worthless and would be crushed by their ridiculous debt burden.

    • Hi Private Fraser

      There are many issues with the public debt numbers but the Japanese have managed to remain homogenous and in my opinion show that 0% inflation is not the disaster many would say. Of course Abenomics wants to inflate the public debt away which I fear would make things worse and not better.

    • Yes, Japanese debt is mostly domestically held by small investors. They aren’t applying the rigour in analysis as many big investors. Maybe the small investors will pass away before they get repayment. Japan mostly has a trade surplus.

      I’d suggest these factors prevent a Yan currency collapse ….

  3. Great blog, Shaun, as always.
    I think the Bank of Canada is still an active participant in the currency wars, although it denies it. Deputy Governor Lawrence Schembri gave a speech in Vancouver last Tuesday.
    In the Q&A afterwards he was asked if the Bank would raise interest rates. In spite of the fact that the US Fed has three interest rate hikes pencilled in for 2017, one of which has just happened, he was completely non-commital. From May 2013, the month before Governor Poloz took office, to February 2017, the loonie has dropped at an annualized rate of 6.5% against the US greenback. Although from December 2016 to February 2017 the Canadian dollar has increased in value against its American counterpart, there is good reason to doubt that this marks a new trend, and not just an interruption as Governor Poloz drives the value of our currency lower and lower.

    • Hi Andrew and thanks

      My first thought as I looked at the link was that Canadian newspapers are offering cheap deals for a month or so too, or everywhere we look that media is struggling. I also decided to look at the trade-weighted Loonie and my eye was caught by the weights as the US Dollar went from 59% in 89/91 to 76% in 99/01 and the Euro fell from 19% to 9%. Although the numbers are out of date in terms of time there has been a big switch towards the US.

      On the monthly reading of 97 for February you have bounced from the 89 of January 16 but a long way below the 124 of July 2011. There is the issue of commodity prices but it will be interesting to see if Governor Poloz can get the Loonie lower.

  4. If any country had an award for devaluing its currency over time and conning bondholders it surely would be good old Blighty, ever since WWI it has had an unblemished record of defaulting on its loans by devaluing its currency – the pound. Its historic record of collapse is a sight to behold, if viewed on logarithmic charts it becomes evident that between massive slumps there are decades where it appears that sterling, and by association, the UK economy is making a recovery and the “bottom” is in, but every time it is merely drawing in more suckers to the inevitable slaughter, as suddenly, without warning, the trap door opens and it again begins its precipitous drop. I believe we are one of those points now.

    If anyone thinks that professional investors, investment managers would have by now wised up, just consider how long the UK treasury kept the charade known as War Loan.Technically it did default in 1932 when it “negotiated” a “conversion” whereby holders of War Loan which was issued at a coupon of 5% was becoming an albatross around the governments neck, it could no longer afford, it offered existing holders a 1% bonus if they continued to hold and thereafter accept a 30% reduced coupon of 3.5%(considered reasonable at the time when bank rate was 2%), or they could redeem them. Most held on to them.

    It was justified at the time by arguing Germany had defaulted on its reparation payments and so, technically Germany’s default was to blame, not the Bank of England.

    In fact the numbers behind the default are even more breath taking than originally apparent. In 1914 the Bank of England held £9m of gold and then issued £300m of banknotes to banks to prevent a collapse of the financial system on the announcement of WWI, effectively leaving the gold standard, £350m War Loan was issued at a coupon of 3.5% in November 1914, however this was followed by a further issuance of £901m at 4.5% in June 1915,in January 1917 a final issuance of £845m was raised by an extension of War Loan which included an offer to existing holders to convert to the higher coupon .

    So effectively, the UK treasury defaulted on some £2.1bn of gilts-an unbelievable sum at the time- by reducing the interest payments by 30%, it had barely got away with that breathtaking fraud by the time Churchill signed us up for WWII, thus ensuring the UK never ever recovered from its millstone of debt.

    Fast forward to December 2014, one hundred years after original issuance, the triumphant announcement by George Osborne that War Loan was finally being repaid!!! Hurrah!!! At around par, holders from 1914 got their £100 back in 2015 pounds that were worth say 2 or 3p of the original- don’t ever say the UK government doesn’t honour its debts!!!

    And so we are here again today witnessing history forever repeating itself in the form of Mark Carney and his magic bubble machine called the UK housing market, that even in the face of falling real wages thanks to QE and zero interest rates, he has managed to re-flate the biggest housing bubble this country has ever seen to exceed the prior highs in most parts of the country, that despite massive trade and fiscal deficits he manages to keep inflating to even greater heights, and even brazenly announcing he is prepared to “look through” higher inflation figures in order to preserve jobs, how magnanimous of him. Of course, as sterling continues to freefall against the backdrop of the above financial conditions fuelling further inflation, he will no doubt say he doesn’t want to add to the UK consumers woes by increasing interest rates as this would further depress the economy.

    So yet again the UK government will do a soft default by inflation, printing enough sterling to cover trade and budget deficits rather than take the tough decisions required and retake control of the economy and interest rates from the cuckoo the housing market has become in the UK economy.

    What political party has the cojones to say to the British electorate – “we are no longer going to be blackmailed by you and your excessive borrowings and speculations any more, those people who gamble on property have to learn it is not a one way bet underwritten by the UK government and will have to learn that property is not a guaranteed ticket to riches and may even lose money.”

    I think not one, we have two more years of Mark Carney,who will be by then, so far behind the curve that he will need the Hubble telescope to see it, and by then, the UK debt mountain will be around £2 trillion, how can the government afford higher interest rates on that?, how can JAMS afford to eat if interest rates go up to a neutral(assuming a very conservative 3% inflation figure)2 or 3%?

    What a mess, there are only some certainties in times like these, and you have one hundred years of history on your side, the UK government will devalue sterling until the problems go away. This time the drop is going to be monumental and the average UK house buyer is going to learn a very long overdue lesson that the “free money” they have made on property is not really that free any more and carries with it a terrible cost.

    • Hi Kevin

      Thank you for the economic history lesson and in particular the War Loan tranches. To think they financed a world war with what seem such small numbers now! Someone posted a while back that the UK could not afford Gilt yields above 3% so you and they are in tune.

    • Thanks for an interesting post that demonstrates that back in 1917 the UK was in what appeared at the time to be an impossible national debt situation and yet it continued for a further 100 years. This goes to show you should never underestimate the establishment’s ability to muddle through, possibly from here to infinity and beyond as Buzz Lightyear might say.

    • Thats right, I now think 3% is probably too high given the continuum of money printing and property bubble. Of course it will be a while before we get forced interest rates rises butit will come eventually.

  5. They are probably coming to an end as I expect 1and maybe 2 more mincing hikes from the Fed this year as contrary to rumour and speculation the US economy is reasonably good although I expect a soft patch this Spring and Summer which I’m sure the Fed expects too.

    Meanwhile in Euroland …… I expect the ECB to RAISE THIS SUMMER OR AUTUMN as narrow money growth is strong and stable, whilst accompanied by steadily falling unemployment which seems to be approaching the NAIRU. Paradoxically, I also expect the ECB to continue QE so as not to spook peripheral bond holders.

    Japan is it’s own land and China has already stopped devaluing, it’s earlier phase of evaluation was as a result of it’s joining the SDR basket of the IMF but it now seems to have achieved fair value, so there’s my take.

    • Hi Noo2

      I suggested a while back that the US could raise interest-rates and do more QE so can hardly argue with the suggestion for the Euro area. This puts us two at odds with the Financial Times which is usually a good place to be…

  6. At around par, holders from 1914 got their £100 back in 2015 pounds that were worth say 2 or 3p of the original- don’t ever say the UK government doesn’t honour its debts! They are probably coming to an end as I expect 1and maybe 2 more mincing hikes from the Fed this year as contrary to rumour and speculation the US economy is reasonably good although I expect a soft patch this Spring and Summer which I’m sure the Fed expects too.

  7. At around par, holders from 1914 got their £100 back in 2015 pounds that were worth say 2 or 3p of the original- don’t ever say the UK government doesn’t honour its debts! At around par, holders from 1914 got their £100 back in 2015 pounds that were worth say 2 or 3p of the original- don’t ever say the UK government doesn’t honour its debts!

  8. At around par, holders from 1914 got their £100 back in 2015 pounds that were worth say 2 or 3p of the original- don’t ever say the UK government doesn’t honour its debts! At around par, holders from 1914 got their £100 back in 2015 pounds that were worth say 2 or 3p of the original- don’t ever say the UK government doesn’t honour its debts!

  9. At around par, holders from 1914 got their £100 back in 2015 pounds that were worth say 2 or 3p of the original- don’t ever say the UK government doesn’t honour its debts! At around par, holders from 1914 got their £100 back in 2015 pounds that were worth say 2 or 3p of the original- don’t ever say the UK government doesn’t honour its debts!

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