What is the latest in the currency wars? Will the UK pound collapse in 2013?

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or effective exchange rate calculated by the Bank of England for the Yen then September 2012′s average of 182 has been replaced by January 16th’s 157.4 for a fall of around 13% at the peak.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?

Comment

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?

This entry was posted in Currency, Euro zone Crisis, General Economics, Gold, Japan's Economic Situation, Quantitative Easing and Extraordinary Monetary Measures, UK Inflation Prospects and Issues and tagged , , , , . Bookmark the permalink.
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  • James

    Slightly off topic, but did you see that Germany is repatriating its physical gold from overseas. Two thoughts
    1. Didnt this happen before the second world war?
    2. Could this be a prelude to Germany having the deutscmark again?
    Just a thought!!

  • Joe

    Great article as usual Shaun. I’m still left wondering at the end of the article though about the title – will the pound collapse in 2013? Will any currency actually fail in these wars?

  • Anonymous

    Shaun,
    Is the Euro leakage from the PIGS now going into U$/Yen rather than Swiss Francs perhaps?

  • Anonymous

    Hi James
    Well if nothing else it is an improvement of the second world war policy of expatriating others gold….

  • ernie

    These gyrations are another symptom of large flows of central bank money swilling around in markets which are simply trying to guess the next political statement and not actually performing their normal function of pricing risk. Incidentally, doesn’t King ever ask himself why the quite large devaluation of sterling since 2008 has produced no improvement in the balance of payments? I’ve seen many of these, right back to Wilson’s day. Devaluation never solves the problem, it only increases inflation

  • JW

    Hi Shaun

    Excellent piece.

    Yes I think your last observation is the most telling. All the fiats are being simultaneously devalued against assets/commodities orchestrated by the vampire squid. Its the only way the 0.1% retain/increase value/control whilst deflating the financial debts which have been ‘nationalised’ by western governments. So the 99% pay through taxation, inflation eroded fiats and lower living standards. The 0.9% are kept ‘whole’ as they are needed to manage the exercise.

    When I say ‘simultaneous’ clearly there will be leaders and laggards in the process so some currencies will look like they are strengthening for periods during the process. With the USD in QE-infinity mode, the Yen in ‘Abe-infinity’ mode , the GBP in QE/going bust mode, the EURO looks like the short-term winner, but only because at the moment the others look so weak. No doubt soon something will happen to exacerbate the EZ crisis.

    With the CHF have the SNB stopped buying so many German bonds because of the latest economic numbers?

    What could go wrong and really set off a re-run of the 30s currency wars? CBs not trusting each other. Is the German gold repatriation , the Chinese and Russian gold buying sprees indications that some are hedging their bets?

  • Drf

    Hi Shaun: “Will the UK pound collapse in 2013?” I fear that is now likely, particularly if the BoE and UK government implement more QE debasement and keep base rate at the “emergency” level for even more YEARS, (well until the markets turn at least)! Also if the UK’s credit rating is downgraded as seems likely later this year, although by itself that would probably not have had much effect, together with these other factors I suspect that it could now aggravate the effect.

    “…I am not sure what “safe assets” and “safe havens” are right now but more detail on this is for another day.” I and I suspect at least some others would like your thoughts on that issue Shaun. Many of us are wracking our brains similarly to decide what are safe havens now?

  • Rods

    Hi Shaun

    Another excellent blog.

    “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.”

    Money tends to flow out of Russia from rich Russian individuals rather than the other way around. Cyprus is particularly popular with Russians and Ukrainians due to a double-tax agreement from Soviet times that has never been updated.

    Information about large deposits in bank accounts will be sold on by bank employees to interested parties. This is usually tax collection employees looking for a ‘tax investigation’ and pay-off or to groups that drive Mercedes and make offers you can’t refuse! 8.25% on an emptied account, where the funds have evaporated, is not much!

    With the UK on the rating agency’s watch and with peak debt due at 97% in 2017-2018 another year of stalled growth, above target inflation, missed deficit reduction targets. I think talk over the summer of a balanced budget pushed back to 2018-19 and the UK’s overall sovereign debt going over 100% will be the trigger for loss of AAA, a fall in Sterling, rises in Gilt interest rates and the beginning of a Sterling crisis. The Government and BOE will respond with lots of QE.

    Many countries seem to be currently on a race to the bottom on currency values. History tells us it tends to end with war! Plenty to choose from here: China and Japan, Israel and Iran, Pakistan and India and North and South Eurozone countries or even Catalonia and Spain!

  • pavlaki

    It doesn’t look like I’ll be doing any business out of Greece or Spain if this is true! The ECB appears to have abandoned the peripheral countries as far as the international value of the Euro is concerned. Businessmen there are fed up with the fact that the needs of the core always overrides those of the southern countries. No sooner was it said that the Euro was ‘dangerously overvalued’ than Nowotony steps in and squashes it. Do they actually want a very high Euro? I’m beginning to think that they do and to hell with the periphery!

  • Alex

    ha ha! I might as well laugh now cause when I am homeless penniless and hungry and the only employment will be within the military if only I could get in it won’t be so funny nor so clever.

    On the day the 23 point gun plan is announced in the USA and on here its suggested Germany getting her gold back…what don’t ‘they’ want you to have?

    Its guns gold and a gateway plan.

    God help the 18 to 25 year olds in the mass unemployment status through out europe as there’s going to be a lot of desert and jungles to fight in once it all kicks off. Currency wars, trade wars, real wars.

    So the hour is beginning to close as prices continue to rise and those ‘preppers’ that are stupid enough to stock pile food and resources are going to be the ones who may survive with any dignity.

  • MickC

    Anyone remember Nick Ridley and his view that the EU was a German device to rule Europe?

  • Anonymous

    Hi Joe
    I have the feeling that a revolving carousel is more likely for most currencies where they fall for a bit but then it is someone elses turn. The £ pound is dicing with 1.60 versus the US $ as I type this and with everyone being so bearish could go through 1.20 against the Euro too but is it simply our turn for a bit?

  • Anonymous

    Hi Chris
    At the moment I think that the Euro leakage has stopped but its rally now makes leaving more attractive which must be starting to occur to some.

  • Anonymous

    Hi JW

    I would imagine that the SNB is starting to get rid of some of its reserves right now as quietly as it can. So perhaps the BIS is on the offer of the exchange rate right now! Whilst 1.237 isnt much of a profit on the 1.20s there was a time when the rate was around 1.05 and it was intervening. In such a case yes it would be selling some of the bonds it bought which were French as well as German.
    Dont forget the SNB was a buyer of the £ too not that long ago….

  • Anonymous

    Hi Drf
    I have made a mental note of the “safe assets” and “safe haven” isues and will be along……

  • Anonymous

    Hi pavlaki
    For all the talk of policy being set for the countries in trouble time and time again we end up with a policy that suits Germany the most!

  • Anonymous

    Thank you I had forgotten that and as I have just replied to pavlaki if you ignore all the hype it is amazing how often policy ends up suiting them is it not?

  • Anonymous

    Hi Rods
    I hope that we stick with the currency wars and not the real ones. Hopefully Churchills dictum that “jaw,jaw is better than war,war” will win out.

  • James

    Hi Shaun,
    This does raise a question to me. We have become so used to the figures that we just shrug and carry on, but isn’t there a point at which Greek/Spanish unemployment will force change? I just don’t understand how anyone can think that policies (whether the fault of the Euro or not) which result in 27% general and >50% youth unemployment are working.

    And yet, there seems to be no willingness to have a fundamental look at the position.

    I believe that the danger is (and I read a lot of history books…) that, if politicians ignore the basic living conditions of their populations in favour of some political dream, the end will be violent, unexpected and irreversible. One should remember that democracy is a pretty recent phenomenon in Spain and modern Greece.

  • pavlaki

    Well now we know! Roesler has just said today that Germany does not want to have a weak Euro. So that’s what Europe will get and it will have to live (or die ) with it. I can’t wait to hear what my Greek and Spanish business contacts think of that!! I really do not understand the German position; after all a weak Euro would help them as well. Surely it can’t just be ‘memories’ of hyper inflation?

  • James

    I would say that this defines the fundamental flaw in the euro. What suits one country (with the most clout) is simply not right for others. This is not a provblem about to go away. I wish your Greek compatriots the very best but fear greatly for them

  • Anonymous

    ….you don’t think it might be a pre-emptive defence against that possibility?

  • Anonymous

    There is a lot in the economics blogosphere on safe assets at the moment, but I haven’t seen anything much on safe havens. Look forward to reading your thoughts, Shaun.

  • Anonymous

    drf

    thing is though, against what would the pound collapse, if all other Western governments with central banks are doing the same as the BoE and the Eurozone is imploding? In the old days of the gold standard, the pound could collapse all by itself. But these days everything is relative.

  • Anonymous

    Shaun, aren’t currency wars in the absence of a commodity standard a bit like the paradox of thrift? If everyone tries to devalue, no-one can.

  • ernie

    Taking James’ point re the unemployment and social change/revolution, I do agree with him. However, I think the “more of the same” policies we see across all our countries even in the face of clear evidence that these policies have completely failed point up that actually the main problem is that no political leadership knows how to combat the crisis and yet remain in power. Anyone who takes radical action (e.g spending/entitlement cuts) will lose votes as our democracies are now really just welfare providers – those who receive will always vote for the party which promises the most and those who pay are now a minority everywhere. For this reason, I don’t subscribe to the consipracy theories. I actually think that the ruling “elites” for want of a better word simply have no idea what to do and respond in a panic mode to every new facet of the crisis. Of course, the trading concerns like the squid with their tentacles everywhere are better informed than any of us and will seek to profit from (even encourage) crises, but I’m not convinced anyone is clever enough to engineer some world master plan.
    I think the odds are that (speaking of the UK) we will be forced into draconian measures eventually since no-one has the political will to tackle the problems, and that includes the electorate. In the end this is all a really catastrophic failure of leadership in the developed countries.

  • Anonymous

    Hi Francis
    Yes I completely agree that it is a zero sum game for every riser there has to be a faller. And with the further fall today in the Swissy and the plummet in the Yen (down 2% against an otherwise weak £) there is currently rather a shortage of risers available, which expains why we are seeing a (somewhat bizarre) rise in the Euro.
    Unless of course a Martian taps the Mars Rover and asks what is this trillion $ coin busines?