Grass getting flattened by fighting FX elephants

August 27, 2015

Young male elephants lock tusks in battle on the plains at the foot of Mount Kilimanjaro in Amboseli national park, southern KenyaThe ongoing race to the bottom for currencies this year is hurtling towards a zero-sum result.

Nearly 40 central banks around the world have rushed to ease policy this year, weakening their currencies in the hope of improving export competitiveness and in some cases lifting imported inflation.

So far, there is very little evidence any of this has helped improve economic growth, given that exchange rates have been falling in tandem, erasing any edge one economy might have gained over another.

World trade recorded its largest contraction since the collapse that followed the 2008 financial crisis in the first half of 2015, according to the Netherlands Bureau for Economic Policy Analysis, keepers of the World Trade Monitor.

The outlook is not very bright for world trade or the global economy over the coming months ahead either.

The latest Reuters polls of around 500 economists across Asia, Europe and the Americas revealed a dimmer outlook across most countries despite cheap oil, rock-bottom bond yields along with soaring stock and property prices.


Stephen King, HSBC’s senior economic adviser, wrote in a recent note:

These monetary actions (central banks easing policy) may be individually sensible but they also create a global ‘adding up’ problem through their possible currency implications.

If, in the new world order, one nation’s gain is another’s pain, it’s hardly surprising that nascent regional recoveries always fail to kick-start the engines of global economic growth.

China’s latest attempt to devalue its currency backfired. Over the past week Chinese stocks had their worst performance since the the global financial crisis began in 2007 and wiped out what was left of this year’s gains, which in June were more than 50 percent.

Growing fears over the weakness of China’s economy has caused large falls across emerging market currencies.

Yet despite that weakness, exports have not materially improved nor has it delivered major boosts to these economies.

On the contrary, the latest Reuters polls show a sharp slowdown in economies from China to Africa to Brazil – something the Reserve Bank of India Governor Raghuram Rajan said would happen six months ago.

Rajan in February said developing countries weakening their currencies unilaterally may hurt emerging economies:

We are in the midst of an age of competitive devaluation and beggar-thy-neighbor policy. When elephants fight, the grass suffers.

India is one notable exception, and is forecast to outperform its emerging market peers. Rajan has been calling for more responsible monetary policy actions and is one of the few not in favour of weakening currencies.

In a newspaper interview on Wednesday, Rajan said:

Unnatural movements in other currencies do certainly impinge on us and we would not want to take the route of making ourselves a less attractive destination for investments which would be one quick and sure way of depreciating our own exchange rate.

I would rather say that let us focus on making our economy more flexible so that we can absorb some of these changes.

The U.S. dollar, on the other side of most foreign exchange rates, has rallied significantly since last summer in anticipation the Federal Reserve will lift interest rates higher this year for the first time in a decade.

While the world’s largest economy has managed to weather this rise, it is clear a strong dollar has clamped down inflation pressures there through relatively cheaper imports from the rest of the world.

The strong dollar has already contributed to surprise weakness in the first quarter, and the expected first move by the Fed as a result has already been delayed to September from June, with more expecting a delay further beyond September now.

Nicole Elliott, a technical analyst and private investor said in a recent television interview:

I believe that the United States has at last woken up to the fact that their strong dollar is a problem for them… So they too are stepping up the currency war which is, as we know, a race to the bottom.

(With additional reporting by Hari Kishan and Sumanta Dey)

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