One of the features as 2012 moved into 2013 has been the movements in exchange rates which in the case of the Japanese Yen has been extreme. Take your pick whether you feel that is because of hopes for what has become called Abenomics or fears of its consequences. In the last few days this has been accompanied by a fall in the Swiss Franc too and so my first thought for you today is this, if even the “currency twins” are now falling in value then the others planning to devalue will find it very difficult to find currencies to fall against in what is in the end a zero-sum game.
The Japanese Yen
In spite of a rally overnight which many are associating with the problems with the Boeing Dreamliner aircraft (something which Boeing has had all sorts of trouble with) although it is also true that Japan’s economy minister gave a warning against further falls, the Yen has dropped like a stone in recent times. At 88 versus the US Dollar,116 versus the Euro and just under 141 versus the UK pound it has weakened substantially. If we look at the trade weighted or effective exchange rate calculated by the Bank of England for the Yen then September 2012′s average of 182 has been replaced by January 16th’s 157.4 for a fall of around 13% at the peak. A perspective on those levels can be gained from considering that they are based on 1990 being 100.
From this there are two clear consequences. Firstly the outlook for Japanese exporters has improved and secondly the outlook for Japanese inflation has changed in that they will have some inflationary pressure. Personally I am fascinated to see what happens next in response.
However if we consider the rest of the world we see if I may take it as a whole that it has appreciated against the Yen when it has got used to depreciating/devaluing against it.
The Swiss Franc
The last few years have been littered with examples of Swiss Franc strength as carry trade unwinding was reinforced by “safe haven” status in troubled times. In a slight diversion I would just like to point out that I am not sure what “safe assets” and “safe havens” are right now but more detail on this is for another day. Nonetheless the Swiss National Bank found itself capping the level of the Swiss Franc at 1.20 versus the Euro by promising “unlimited” intervention and “utmost determination” back on the 6th of September 2011. One group outside of Switzerland who would have been very grateful for this would be those in Eastern Europe who had taken out Swiss Franc mortgages (Hungary in particular) but had seen the Swiss Franc then surge which raised their debt in their own currency.
Since then the Swiss Franc has pretty much been stuck at Euro 1.20 like a fly on some flypaper. At least until January 10th when it took flight and departed and reached a nadir of 1.24 (it is now 1.234). So after remaining a currency which non-Euro currencies can still fall against the last few days have seen something of a change and we await to see if it is a sea-change. I am sure the Swiss when they capped their exchange rate against the Euro did not expect a Euro rally taking them with it! Or to be more specific the falls that they no doubt hoped for have been replaced by a rally which has begun to get close to taking them back to where they started.
Those in Eastern Europe holding foreign currency mortgages will be watching this like a hawk as 2013 has up to now seen weakness for then as 294 Hungarian Forint are needed to buy one Euro as opposed to the 281 of the end of November. Even the Polish Zloty (2012′s currency of the year) has weakened too.
The UK Pound
The last week or too has seen sell note after sell note issued by brokers on the value of the UK pound. This provoked two thoughts. Firstly that they were a bit late for it against the Euro as the peak of 1.285 last summer has been replaced by us getting close to 1.20. Secondly that we have been surging against the Japanese Yen as we made 143 (141 now) whereas a year ago we had dipped to 117.
Such views do follow on from the official line however. Bank of England Governor Mervyn King hinted at this in a speech in New York.
And you can see month by month the addition of the number of countries who feel that active exchange rate management, always of course to push their exchange rate down, is growing.
I think that he fears that others are at the same game as he himself! As he said this when introducing the latest Bank of England Inflation Report back in the middle of November 2012.
I think it’s fair to say that the increase in the effective exchange rate of sterling -after all in the last year, just over, 15 months, since the middle of 2011 when the euro area crisis intensified, the effective exchange rate of sterling has risen by 8 per cent and against the euro by 12 per cent. That is not a welcome development.
That came firmly in the section headlined trying to talk down the pound!
Today has made the subject return to my mind as the pound has neared a couple of benchmarks as we veered close to US $1.60 and also 1.20 versus the Euro just as we dropped back to 141 Yen due to its rebound. Take your pick of the possible causes, the sad helicopter crash just up the road in Vauxhall or the fact that beefburger has been placed in my financial lexicon by Tesco in response to some apparent horseplay. I am reminded of the fact that whilst there are occasions that the consensus view is correct they are relatively rare. But dips below US $1.60 and Euro 1.20 would rev up the media.
If you look at the UK economy in isolation it is easy to argue that the pounds value should fall. The catch is when you ask against what exactly?
I have kept mostly quiet in this update about the new muscleman of the currency world which is the Euro. It has risen against the US Dollar and UK Pound and surged against the Japanese Yen. This is exactly what the troubled nations such as Greece,Ireland,Spain and Portugal do not need but so far it is what they have got. As ECB board member Nowotony has just said he is not worried about it rising further against the US Dollar I am reminded of a seminal work in this area by Rudiger Dornbusch back in 1976 which discussed “overshooting” of exchange rates.
Meanwhile at the Bank of Russia I see talk of new front in the “currency wars” being discussed and if I was there with an official interest rate of 8.25% I would be concerned about Russians borrowing at cheaper rates in foreign currencies too. I am sure the various Oligarchs will have spotted that game.Before this is over I expect “currency wars” to flare up all over the globe and I fear a repetition of the competitive devaluations which so marred the economic landscape of the Great Depression of the last century.
As a last thought currencies can fall or devalue in another way. The price of real assets can rise be it wheat,corn,oil or gold and paper currencies can fall against them. Is that why the commodity boom has not fully deflated?