While no countries are willing to admit it – the currency war is on. Over the past week we have seen a number of central banks take action to devalue their currencies. The European Central Bank and Reserve Bank of Australia cut interest rates by 25bp to record lows and last night, we learned that the Reserve Bank of New Zealand sold its currency to cap its rally. Of course, we can’t forget that the Bank of Japan fired a bazooka last month when they announced a 1.4 trillion Quantitative Easing program.
Techniques have varied but the goals have been the same – to stimulate their economies and boost their competitive advantage through a weaker currency. At a time when growth is a premium, every country could use a weaker currency because a stronger currency threatens the meager of amount of growth that most countries are expected to see this year. As a result central banks around the world have been fighting hard to prevent their own currencies from appreciating. The Fed, BoJ and BoE are buying bonds, the ECB and RBA cut interest rates and the RBNZ intervened in its currency directly. The decision by the RBNZ to intervene over cutting interest rates was particularly interesting since New Zealand has plenty of room to lower rates. This was clearly a conscious decision on their part to focus on capping the currency’s rise. Taking a look at the charts, the “intervention” appears to have occurred on April 15th, which suggests that 86 cents is their pain threshold for the currency. The RBA also said a strong currency was the motivation for this week’s rate cut.
The choice of technique depends on a central bank’s level of aggressiveness and availability of other measures (U.S. and Japanese rates are already at zero). However, with central banks around the world trying to depreciate their currencies at the same time, their efforts are offsetting each other and leading to consolidative price action currencies. In other words, the reason why we haven’t seen any breakout moves in FX over the past 3 months is because of all of the shots taken by central banks around the world. Until one comes to the war with a machine gun in tow, currencies could be stuck in range.
The one unambiguous benefit of the currency war however is cheaper financing for individuals and corporations, which is why equities are on tear. Central banks are flooding the market with different forms of liquidity and making life easier by weakening their currencies. Eventually this should translate into stronger business and consumer confidence and hopefully spending but for the time being with inflationary pressures low, more shots could be fired in the war.