Macro Wrap – Currency Wars

by Enis January 16, 2013 7:56 am • Commentary

Jean-Claude Juncker, the President of the Euro Group, stated yesterday that the Euro was at “dangerously high” levels, obviously attempting to talk down the currency after its more than 10% rally since the summer.

Japanese officials have been talking down their currency for the past few months as well, and indicating that they will take more monetary action to show that it’s not just talk, but action as well.

The Swiss central bank has had its currency pegged to the Euro since Sept. 2011, in an effort to prevent the currency from strengthening any further.

And of course, the U.S. dollar is still not far from its multi-decade lows as the Fed institutes more monetary stimulus with each passing year.

These are modern day currency wars.

Each country would like to stimulate its exporting industries with a cheaper currency.  Emerging market countries like Brazil and South Korea have been complaining about this currency battle for more than a year now, and central banks around the world have been intervening in their own currencies to prevent unwanted appreciation.

So this is no new trend.  But Juncker’s comments yesterday caught my eye because it was the first time European officials had inserted themselves so forcefully into this debate.  The Euro is the second-most important currency in the world (after the dollar), and up to this point, European officials have stood by the general line that market forces should determine currency values.

But no longer.  Clearly, European economic weakness has the policymakers worried.  They don’t want to sit idly by while other countries’ multinational companies benefit from relative price decreases in their own offerings.  Unfortunately, not everyone’s currency can go down at the same time.  Some currencies must appreciate.

I expect the currency wars to get more heated.  What often follows is more protectionist measures, as countries use tariffs and quotas as one more tool in the fight.  In this context, U.S. companies with primarily domestic sales are going to be viewed more favorably vs. those companies selling abroad.  This is a long-term theme, but one with important implications.

Markets overnight:

  • Asia was weak across the board, led by Japan down 2.5% after its 20% rally in the past 2 months.  More reports that recent Chinese data might overstate demand
  • Europe has been red most of session, down 0.5% now.  The German government cut the growth forecast for Germany to 0.4% in 2013 from 0.7% in 2012
  • SPX futures are down 0.4% and Treasury bonds and the dollar are both bid higher.
  • JPM reported slightly better than expected earnings, with a lot of one-time items, but revenue was only in line, stock trading down 1%.  GS on the other hand beat on all metrics, stock up 2%
  • BA down 4% as Japan grounds all Dreamliners after more problems.