No, I am not talking about their recent cricket, rugby or cycling prowess, but their current form in the “Currency Wars”. Newspapers and G20 summary statements refer to “currency wars” as policy maker’s capital controls, low interest rates, and the big bazooka of them all, quantitative easing polices. By way of example, the UK Pound has fallen precipitously in recent weeks and, as Bill Gross of PIMCO stated in a February FT article, “In a race to the currency bottom the ultimate winner will be the central bank that prints the fastest. The insinuation is undoubtedly true, although the assumption that any individual country or currency can win this war is rife with historical refutation.”
As discussed in MitonOptimal’s opening quarterly review of the year: ‘One of the more interesting New Year forecasts appeared in Bloomberg in mid-January when Russia warned of a fresh “currency war” as European policy makers joined Japan in bemoaning the cost of rising exchange rates. Alexei Ulyukayev, the first deputy chairman of the Russian central bank stated at a conference, “Japan is weakening the Yen and others may follow.” Luxembourg’s Prime Minister also complained of a “dangerously high Euro” and officials in Norway had expressed exchange rate concerns. Miners and grape growers in South Africa feel the Rand should be significantly lower, farmers in Australia and New Zealand want a lower Aussie / Kiwi Dollar and Emerging Markets have repeatedly complained about strong currencies as a result of easy monetary policies in the west, particularly Brazil. A Greek tourist operator would also no doubt like a weaker currency. As Japanese exporters have become 20% more competitive than their Korean counterparts over recent months, thanks to the Bank of Japan actions, no doubt the next few months will be interesting as to whose reneging on the 2009 G20 finance minister pledge to “refrain from competitive devaluations.”
It is a key skill and performance component of any multi asset portfolio manager to be able to manage currency exposure and navigate the “currency wars”. Whether that is hedging back into base currencies or attempting to add returns through active foreign exchange management, any good fund manager should be watching global currency movements with a sharp eye.
Well, the UK has come from behind and shot out to lead the peloton with the Japanese. The UK lost its AAA credit rating a few weeks ago, which was not really surprising to anyone except George Osborne, but as Tim Price commented in his research: “Britain’s credit downgrade last week came as something of an anti-climax. The ratings agencies long ago lost what little credibility they ever had. Being downgraded by Moody’s is like being called a moron by a moron.”
However, this did help the Pound weaken significantly in February. As Bill Gross went onto explain – that unlike the currency wars in the 1930’s which were against each other and the gold standard, this “war” is a war against stagnant growth and high unemployment and it is a race to print money, devalue currencies and create artificial asset pricing. Instead of looking at fundamental PPP and Big Mac indicators to value currencies at present, one needs to sell the serial QE offenders and weakening credit ratings. In that case, the UK has definitely just played a blinder!
|The above data and research was compiled from sources believed to be reliable. However, neither MBMG International Ltd nor its officers can accept any liability for any errors or omissions in the above article nor bear any responsibility for any losses achieved as a result of any actions taken or not taken as a consequence of reading the above article. For more information please contact Graham Macdonald on [email protected]|