The currency wars have begun - page 2
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Did the currency wars ewer stopped?
.....................
But a couple of currencies left out of that picture
The currency War have Begun: Yuan affecting EURO and YEN
PBOC’ surprise action to devalue the renminbi by 1.9% on last Monday, have initiated a currency war among many global and commodity-driven markets. The economies likely to get hit from this devaluation are- Eurozone and Japan. Both the nations are on different stages of monitory easing and would be greatly affected on trading terms as the exports of China will become more competitive and cheap.
Although ECB is following the stimulus programme of Euro60 billion, which is to be pumped per month for the next 18 months, initiated by the latter in Jan 22, 2015 and commodity market is flooded with turmoil since last 20-25 days; still the GDP data of Germany, Italy and France has been reported to be poor and the inflation has still not been picked up. This situation can get worsen if China continues to devalue its currency as it will greatly affect euro zone’s inflation expectations.
And for Japan, which is following the similar lines is also seeing the similar threat like Euro zone. Slump in the commodity market due to China’s slowdown, contraction of Japan’s GDP for the second quarter c to 1.6% and the surprise move in Beijing, all are proving to be against the Japanese economy. Further depreciation in Yuan will have a long-term impact on Japan.
Interesting. Thanks.
Currency Wars Escalate As China’s Move Triggers a Chain Reaction
As we are now more than halfway into the third quarter of 2015, substantial divergence still prevails around the world in terms of monetary policy and economic conditions, with certain regions experiencing accelerated growth and several others still struggling. Inflation has reached several decade lows despite monetary policy being extremely loose in most of the developed economies and tight in emerging economies and credit spreads are trading below default rates, while yields still remain near historic lows.
Such low inflation rates around the world, and disinflation caused by sliding oil and other commodity prices, have been triggering a number of central bank responses such as negative interest rates, asset purchases and FX interventions, in summary declaring Currency Wars. Manufacturing activity in China has reached a six-year low Currency war is a tactic used in international affairs with potentially destructive outcomes. Countries enter a race to the bottom in an effort to boost their ailing domestic economies and growth figures by competing against each other in weakening their currency to achieve a relatively low exchange rate. This policy effectively causes countries to “steal exports” and therefore growth from their trading partners. The result can be a potential decline in international trade, eventually harming all countries.
In recent years, countries that have been participating in a competitive devaluation race since 2010, have used a combination of policy tools, including quantitative easing, direct government intervention and imposition of capital controls. From Easy Monetary Policy to Outright Competitive Devaluation Monetary easing measures by BOJ and the ECB, bailouts in Greece and Ireland, Chinese currency manipulation, the unexpected move of SNB to remove the 1.20 peg on the EUR/CHF pair and Sweden dropping the Swedish krona interest rate below zero, have all been indicators of the intensification of the currency wars in recent times. In extreme cases, countries have even resorted to the ultimate measure of imposing capital controls in order to prevent currency outflows, as seen in Greece after the Euro-zone bailout negotiations fell apart last June.
The recent burst of the Chinese stock market bubble has proved to be a major catalyst in global market developments, as it has been adding severe pressure on the Chinese economy, threatening to drag it further down to the slowest pace since 1990. In an effort to put a brake on the stock market decline and deteriorating economic growth, China unexpectedly moved last week towards devaluating its currency, a move that has intensified the continuing currency wars. Furthermore, as the latest figures issued this morning indicate that manufacturing activity in China has reached a six-year low, the possibility of further currency devaluations in the near future is high.
As already discussed in our previous article titled ”Is This the End of the Chinese Stock Market Meltdown or Just the Beginning?”, the bubble was created as share prices had been disconnected from underlying economic fundamentals causing a stock market rise of 150 percent over the past year, which was not justified by dividend yields, return on equity or other financial characteristics of companies.
Even though the Chinese government has persistently been trying to prevent further stock market losses by drawing the line around the 3,500 level for the Shanghai Stock Exchange Composite Index (SHCOMP), it is questionable whether it will continue to provide support in order to sustain this market level indefinitely, as it is proving to be a very expensive exercise.
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Well I guess that this war has begun far long ago. I believe it's not only complicated circumstances, but also one of FX main options. All in all, EUR seems to be not always stable.
This time this is not about Euro. It is about FED and their obvious decision to postpone rate hike after the elections - which means that USA does not have independent monetary policy but is exclusively ruled by politicians - which have no idea about economics at all
Central Banks Step Up Verbal/Physical Intervention
Central Banks Step Up Verbal/Physical Intervention
Central banks around the world have been extremely active this summer intervening in their currency on a verbal and physical basis. At first it seemed that these efforts were beginning to subside, but overnight the Chinese yuan jumped 1%, its largest one-day rise ever, raising speculation of central-bank intervention. A senior Japanese lawmaker also talked about increasing the Bank of Japan's Quantitative Easing program, a day after Prime Minister Abe pledged to cut interest rates. Between the big moves in the U.S. dollar and the wild swings in Chinese stocks, countries around the world trembled at the impact on their economies. In recent weeks we have seen moves by India, Brazil, Turkey, Russia, South Korea and Indonesia to prop up their currency. Other countries like Japan are actively talking about measures that would the weaken yen.
Central banks in developed and emerging-market countries are becoming desperate. They are looking at the landscape and seeing little chance of a turnaround in the Chinese economy and an upcoming rate hike from the Federal Reserve. Tightening by the world's most important central bank not only impacts the U.S. economy but countries around the world. On its most fundamental level, a rate hike usually leads to a stronger dollar, which can affect the value of commodities, emerging-market currencies, their exports and economy. In order to ease the pain, these central banks have dug deep, and the reserve levels of some nations are dangerously low. We recently learned that China's reserves dropped $94B in August. The Asian leader still has a large coffer but countries like Malaysia and Indonesia are running out of money fast. With emerging-market nations contributing 40% of global output, a further slowdown in China and a rate hike by the Federal Reserve could trigger more fiscal, monetary and currency intervention.
While the U.S. economy is not directly impacted by these intervention efforts, the competitive devaluation has undercut the market's confidence in central bank economic management, and that uncertainty has increased the volatility in the market. The Federal Reserve faces a very difficult decision next week. 60% of economists surveyed by Bloomberg are still looking for a rate hike but Fed fund futures are pricing in only a 30% chance of a move. Based on the performance of the U.S. economy alone, the Fed should raise rates. But they do not operate in a vacuum and between the volatility in international equities, a dovish ECB and the actions by central banks, it will be difficult for Yellen to pull the trigger. Even if they raise interest rates, the chance of another hike in 2015 is slim. In other words, one-and-done is all we'll get from the U.S. central bank this year.
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