The past few months have indeed been choppy for currencies across the globe. A weakening dollar set major currencies from other developed as well as emerging economies rising at an alarming pace. Adding to the worries, central banks across the world, embarked upon procedures to directly intervene in the money market to help curb the growth trajectory of their own currency.
The week has stood witness to Brazil enforcing 1% tax on currency derivatives, the Japanese PM calling the yen strongly over-valued and the Swiss National Bank directly intervening in money market to weaken the super-strong Swiss-franc. The question that arises now is, are we truly at the beginning of what the Brazilian PM termed, ‘Currency War’?
CNBC TV18's Menaka discusses this burning issue with Andrew Busch, Global Currency and Public Policy Strategist at BMO Capital Market.
Q: Do you agree with the Brazilian finance minister, is this a war and if it is, who is winning it?
A: It appears to be an economic war, and I would say the Brazilians, the Japanese and the Swiss are losing badly as their currencies continue to strengthen dramatically. It doesn’t matter what steps these governments take, they are just overwhelmed by the size of the currency markets that want exposure to the currencies for either fundamental or safety reasons.
Q: What is your take on where the dollar is headed from here on the back of all that very discouraging economic data that we have seen for a second half in the US that was in fact meant to be stronger?
A: There is a lot of discussion about whether or not the US is going to lapse into a recession. With that, the odd thing is that at times, with the risk of trade where people are selling equities, buying bonds, generally get the yen and the Swiss franc and actually the US dollar, to outperform. However, when you see this slower economic data, if it persists, you are going to hear a lot more discussion in the market place about another round of quantitative easing from the Federal Reserve. That has been one of the major drivers as to why the dollar has remained weak against most major currencies over the last two years. So if we were to get another round from the Federal Reserve, I would imagine the only thing that they would derive the benefit from in this pursuit of a third round of quantitative easing would be a lower dollar, and they would likely come out and state that explicitly.
Q: In which case should we be anticipating even more moves by the Brazilians, the Japanese other emerging economies; Korea has been threatening some intervention, should we expect even more moves on behalf of those countries to help stem the rise in their currencies because that’s going to create domestic issues for them and put their exporters out of business?
A: Yes, that’s right. You are going to continue to see this and it will be ongoing until the US economy stabilises. Looking at what Switzerland did today, it not the panacea or medicine that’s necessary to get the Swiss Bank to stop strengthening. They are going to lose some exporters in that country; 50% of their GDP comes from exports and its going to get hit pretty hard. So Switzerland is going to see slower economic growth, going forward. Brazil, they have been trying to deal with an inflation issue there, which having a higher stronger currency is helpful, but certainly, their exports are negatively impacted coming to the United States. However, much of the Brazilian export go to china, so if we would see a slowdown in China, you will likely see an easing of the Brazilian Real against the US dollar. So far, I don’t think that’s likely to occur, so further steps are going to happen as far as government policy towards the currency.
Also read: Yen falls as Japan intervens, Nikkei jumps
Q: There are experts who say maybe in the near-term, we could in fact see the Yuan becoming a reserve currency. I don’t know how much reality or possibility there is in that statement. What do you make of it?
A: Until they open up their capital accounts, they are not going to see the currency use as much as it should be as a reserve currency. You have to be a net capital exporter and have a capital account deficit to do it. You have to have a lot of bonds as well for investors and for reserve managers to utilise your currency as a place or they can park their reserves. So I would say, China is long way off. However, in terms of long ways, they could be five years and maybe even ten years, but they need to open up their currency to further use within the economy, both internally and externally, before it becomes a major currency. Having said that, we know that a lot of people are very upset with the United States and the way that they have handled the budget deficit, specifically because China owns so many US treasury securities and own so many US dollars, but I think for now, there is no other place for them to put the money.
Q: How are you playing the currency trade, what are you betting your money on?
A: What we are trying to do is figure out what is the safest way to play this crazy market. To be honest, you can’t have a long-term vision or even a medium-term vision with the currencies; it’s just too volatile. The Swiss Franc even though we have seen the swift move most people are still trying to get in an exposure to that trade, so if we would see again any rally in the US dollar, we are likely to buy Swiss Franc to take advantage of the continuing stronger currency.