Schroders’ Keith Wade and Clive Dennis see impact of ‘currency wars

Keith Wade, chief economist, and Clive Dennis, head of Currency at Schroders have looked at the renewed intensity of what they term ‘currency wars’ around the globe since the start of 2013.

Keith Wade, chief economist

The main central banks are heading for around $1.7trn of asset purchases in 2013. The US is now directly targeting unemployment and the BoJ is committed to ending deflation. Both targets are ambitious and will require considerable purchases. Importantly for investors, the commitment is seen as acting as a put option, underwriting the current level of asset prices.

The exception on quantitative easing, of course is the ECB, which will not be making unsterilized bond purchases in 2013, or in any subsequent year for that matter. There is a “Draghi Put” which originated with the ECB President‘s famous “whatever it takes” speech in London last summer. However, compared to the others, it is well out of the money. As a consequence, foreign exchange markets have drawn the conclusion that the euro is the most attractive currency and as a result the single currency has been gaining ground.

There is some disagreement within Europe over the strength of the euro: Jean- Claude Juncker (former head of the Eurogroup) said the currency was dangerously high, but ECB council member Nowotny said he did not share these concerns as the aim of the bank was price stability. Mario Draghi observed that the currency is in line with its long run average. There has been greater clarity in Japan where widespread calls for greater currency weakness helped push JPY through 90 against the dollar. At the Davos meetings Japan drew a fair amount of sympathy for its policy, despite the protests of some.

More recently, another “winner” in the currency war has been the UK with the GBP falling following remarks by the BoE governor elect Mark Carney who said there was scope for monetary policy to do more to boost growth.

Changes in currency redistribute growth and the rise in the euro is not good news for the region. The degree to which different countries can cope with a stronger exchange rate depends on the extent to which they compete on quality or price. Countries like Germany are more resilient than those in the periphery such as Italy in this respect. Consequently the rise in the euro may begin to renew the stress within the euro region.

Clive Dennis, head of Currency

The currency wars have been in play in an indirect fashion for some years already via competitive bouts of money printing (by developed over-indebted countries) and the corresponding FX reserve build up in emerging markets.

With little growth momentum and exhausted monetary policy, politicians in the developed markets are getting nervous for their own survival. Rules (fiscal and monetary) get bent more and more out of shape and beggar thy neighbour policies rise up as the only option left. That gets reflected in trade wars, protectionism and currency devaluation although nobody likes those terms. We now call them currency wars.


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