Currency Wars Evolve With Goal of Avoiding Deflation By David Goodman, Lucy Meakin and Ye Xie Oct 23, 2014 Link.
Currency wars are back, though this time the goal is to steal inflation, not growth.
Brazil Finance Minister Guido Mantega popularized the term “currency war” in 2010 to describe policies employed at the time by major central banks to boost the competitiveness of their economies through weaker currencies. Now, many see lower exchange rates as a way to avoid crippling deflation.
Weak price growth is stifling economies from the euro region to Israel and Japan. Eight of the 10 currencies with the biggest forecasted declines through 2015 are from nations that are either in deflation or pursuing policies that weaken their exchange rates, data compiled by Bloomberg show.
“This beggar-thy-neighbor policy is not about rebalancing, not about growth,” David Bloom, the global head of currency strategy at London-based HSBC Holdings Plc, which does business in 74 countries and territories, said in an Oct. 17 interview. “This is about deflation, exporting your deflationary problems to someone else.”
Bloom puts it in these terms because, when one jurisdiction weakens its exchange rate, another’s gets stronger, making imported goods cheaper. Deflation is a both a consequence of, and contributor to, the global economic slowdown that’s pushing the euro region closer to recession and reducing demand for exports from countries such as China and New Zealand.
Biggest Declines
Bank of Japan Governor Haruhiko Kuroda said last month he’d welcome a lower exchange rate to help meet his inflation target and may extend the nation’s unprecedented stimulus program to achieve that. Like his Japanese counterpart, European Central Bank President Mario Draghi has acknowledged the need for a weaker euro to avoid deflation and make exports more competitive, though he’s denied targeting the exchange rate specifically.
After the Argentine peso, which is plunging following a debt default and devaluation, the yen will be the biggest loser among major currencies by the end of 2015, according to median strategist forecasts compiled by Bloomberg as of yesterday. A 6 percent decline is predicted, which would build on a 5.5 percent slide since June.
The euro is also expected to be among the 10 biggest losers, with strategists seeing a 4.8 percent drop. The yen traded at 107.21 per dollar 10:18 a.m. in New York, while the euro bought $1.2658.
‘Spilling Over’
At 0.3 percent in September, annual inflation in the 18-nation bloc remains a fraction of the ECB’s target of just under 2 percent. Gross-domestic-product growth flat-lined in the second quarter, while Germany, Europe’s biggest economy, reduced its 2014 expansion forecast this month to 1.2 percent from 1.8 percent.
Disinflationary pressures in the euro area are starting to spread to its neighbors and biggest trading partners. The currencies of Switzerland, Hungary (HUCPIYY), Denmark, the Czech Republic and Sweden are forecast to fall from 3.8 percent to more than 6 percent by the end of next year, estimates compiled by Bloomberg show, partly due to policy makers’ actions to stoke prices.
“Deflation is spilling over to central and eastern Europe,” Simon Quijano-Evans, the London-based head of emerging-markets research at Commerzbank AG, said yesterday by phone. “Weaker exchange rates will help” them tackle the issue, he said.
Hungary and Switzerland entered deflation in the past two months, while Swedish central-bank Deputy Governor Per Jansson last week blamed his country’s falling prices partly on rate cuts the ECB used to boost its own inflation. A policy response may be necessary, he warned.
Currency Pegs
While not strictly speaking stimulus measures, the Swiss, Danish and Czech currency pegs -- whether official or unofficial -- have a similar effect by limiting gains versus the euro.
Measures like these are necessary because, even after a broad-based dollar rally, eight of the Group of 10 developed-nation currencies remain overvalued versus the dollar, according to a purchasing-power parity measure from the Organization for Economic Cooperation & Development.
Some central banks have GDP, rather than inflation, in their sights. That’s particularly true of exporters, for whom a lower exchange rate makes their goods cheaper.
New Zealand, where second-quarter annual inflation was the fastest in 2 1/2 years, announced last month its biggest currency intervention in seven years, sending the local dollar to a 13-month low.
Deflation Story
The so-called kiwi will drop 5.7 percent to 75 U.S. cents by the end of 2015, the median estimate of 33 strategists surveyed by Bloomberg shows. That follows an 9.2 percent slide since mid-year, the third-biggest among 31 major currencies.
Goldman Sachs Group Inc. lowered its forecast for the shekel on Oct. 6, citing the Bank of Israel’s efforts to combat its first slide into deflation since 2007. Its measures have included rate cuts and local-currency sales. Goldman Sachs sees the shekel falling to 3.9 per dollar in 12 months, from 3.7438 today and compared with a previous estimate of 3.66.
“Deflation is such a major part of the story that dealing with that, by whatever means necessary, is key,” Simon Derrick, the London-based chief currency strategist at Bank of New York Mellon Corp., said Oct. 17 by phone. “If that involves getting the currency lower, then so be it. You have to deal with it.”
Any expressed market opinion is my own and is not to be taken as financial advice
Yeah, I can buy eye magnifiers from the cheapo goods store for $5!
However price deflation is tough for people who racked up huge debts, like all the poor fools who bought into Rudd's mad mortgage scheme and now are selling to escape crushing repayments.
Now watch those medians spiral downwards for the next few years!
The next trick of our glorious banks will be to charge us a fee for using net bank!!! You are no longer customer, you are property!!!
As I've often said, the exchange rate remains high by historical standards and, understandably, some trade-exposed sectors still find it quite uncomfortable. When judged against current and likely future trends in the terms of trade, and Australia’s still high costs of production relative to those elsewhere in the world, most measurements would say it is overvalued, and not by just a few cents. I acknowledge that we live in unusual times, with interest rates near zero in major economies — a factor supporting the Australian dollar in recent years. Nonetheless, we think that investors are underestimating the likelihood of a significant fall in the Australian dollar at some point.
As I've often said, the exchange rate remains high by historical standards and, understandably, some trade-exposed sectors still find it quite uncomfortable. When judged against current and likely future trends in the terms of trade, and Australia’s still high costs of production relative to those elsewhere in the world, most measurements would say it is overvalued, and not by just a few cents. I acknowledge that we live in unusual times, with interest rates near zero in major economies — a factor supporting the Australian dollar in recent years. Nonetheless, we think that investors are underestimating the likelihood of a significant fall in the Australian dollar at some point.
Great stuff Glenn. It's heart warming to hear you issue reassuring words in such an eloquent fashion. As we all know it's the delivery, not the substance, that counts.
This is one of my favorite quotes of yours:
"It were not best that we should all think alike; it is difference of opinion that makes horse races." - Mark Twain on why he avoids discussing house prices over at MacroBusiness. "Buy land, they're not making any more of it." - Georgist Land Tax proponent Mark Twain laughing in his grave at humourless idiots like skamy that continually use this quip to justify housing bubbles.
Classic inflation/deflation was all about the real money supply, that being the currency. But since the GFC real currency in circulation has increased 50%. However the beneficiaries were the big end of town. So it was more like inflation for the rich and deflation for the poor.
Modern inflation/deflation is very much about credit and the central banks attempt to create artificial growth by all means. The new phase of credit stimulation actually began well before the GFC. Modern QE is the central banks buying commercial credit to stop it from collapsing.
The problem is a market that thinks anything less than persistent growth is some type of deflation. The western central banks printed with gay abandon post war but in the late 1980's assumed a policy of "low" but persistent inflation. Since then devaluation of the currency has typically been in the region of 5 to 5.5% pa.
The inflationary effects of persistent printing were hidden in the globalist agenda which is in the process of cracking up. Now the inflation has nowhere to hide. Hence in a place like Australia inflation will became visible in spectacular fashion towards the end of the decade.
It must be noted the central banks only view inflation as "bad" inflation, that is common goods and wages. The central banks never saw a "good" inflation, the growth of asset prices that they didn't like. But this is inflation as well and it is going to haunt the central banks. This is now appearing in the growing price of energy supplies like gas and electricity. Inflation will always follow deflation and one will always follow the other.
The grave of globalism will be WW3 even if it takes a generation or two to fully manifest.
The next trick of our glorious banks will be to charge us a fee for using net bank!!! You are no longer customer, you are property!!!
Classic inflation/deflation was all about the real money supply, that being the currency. But since the GFC real currency in circulation has increased 50%. However the beneficiaries were the big end of town. So it was more like inflation for the rich and deflation for the poor.
Modern inflation/deflation is very much about credit and the central banks attempt to create artificial growth by all means. The new phase of credit stimulation actually began well before the GFC. Modern QE is the central banks buying commercial credit to stop it from collapsing.
The problem is a market that thinks anything less than persistent growth is some type of deflation. The western central banks printed with gay abandon post war but in the late 1980's assumed a policy of "low" but persistent inflation. Since then devaluation of the currency has typically been in the region of 5 to 5.5% pa.
The inflationary effects of persistent printing were hidden in the globalist agenda which is in the process of cracking up. Now the inflation has nowhere to hide. Hence in a place like Australia inflation will became visible in spectacular fashion towards the end of the decade.
It must be noted the central banks only view inflation as "bad" inflation, that is common goods and wages. The central banks never saw a "good" inflation, the growth of asset prices that they didn't like. But this is inflation as well and it is going to haunt the central banks. This is now appearing in the growing price of energy supplies like gas and electricity. Inflation will always follow deflation and one will always follow the other.
The grave of globalism will be WW3 even if it takes a generation or two to fully manifest.
Re "The grave of globalism will be WW3 even if it takes a generation or two to fully manifest. "
You are starting to understand friend. The end will not be a Economic Collapse that the Bears prey for.
No, the Controllers will keep things going until its time for TOTAL WAR !!!
Quote of Albert Pike.
"The Third World War must be fomented by taking advantage of the differences caused by the "agentur" of the "Illuminati" between the political Zionists and the leaders of Islamic World. The war must be conducted in such a way that Islam (the Moslem Arabic World) and political Zionism (the State of Israel) mutually destroy each other. Meanwhile the other nations, once more divided on this issue will be constrained to fight to the point of complete physical, moral, spiritual and economical exhaustion…We shall unleash the Nihilists and the atheists, and we shall provoke a formidable social cataclysm which in all its horror will show clearly to the nations the effect of absolute atheism, origin of savagery and of the most bloody turmoil. Then everywhere, the citizens, obliged to defend themselves against the world minority of revolutionaries, will exterminate those destroyers of civilization, and the multitude, disillusioned with Christianity, whose deistic spirits will from that moment be without compass or direction, anxious for an ideal, but without knowing where to render its adoration, will receive the true light through the universal manifestation of the pure doctrine of Lucifer, brought finally out in the public view. This manifestation will result from the general reactionary movement which will follow the destruction of Christianity and atheism, both conquered and exterminated at the same time." 4
I just hope I get to live out the rest of my life before it starts. There will not be any Human Winners.
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