by Richard Barley
December 27, 2012
“The idiocy of free trade as
we know it is becoming clear today as our trade deficits
mount, our ability to manufacture falls, and the
administration is busy trying to deliberately destroy
the value of the dollar all in order to make up for
counterproductive, ruinous, undemocratic, and costly
“free trade ” policies.
The result of currency value
decline is that we lose any previous gains from free
trade and, worse, purposely reduce the value of our
money and assets.
This self-defeating process
is in lieu of simple, compensating and incentivizing,
tariffs giving every country the freedom to control
their level of globalization and interdependency… via
their own democratic processes.”
Currency Ruin Or Compensating
How to play the great
Faced with a sluggish recovery,
Reserve is buying yet more bonds and targeting lower unemployment
of Japan is under political pressure to be more radical
governor-designate of the Bank of England has floated the idea of a looser
monetary policy target
The result could be a race to the bottom for
currencies - but not everyone can be a winner.
The immediate focus in 2013 is likely to be on the yen. Shinzo Abe’s
newly elected government has demanded the BOJ do more to pull Japan out of
its slump: a higher inflation target is a possibility.
Expectations of a more activist BOJ already have
weakened the yen which now trades at ¥86 against the dollar compared with
around ¥78 in July-October. Fair value for the yen is ¥104.65 against the
dollar, Goldman Sachs GS -0.11% estimates.
But the question is whether the
BOJ will embrace this task wholeheartedly.
Some analysts suspect the Fed’s experimental
monetary policy will yet outgun the BOJ, potentially limiting yen weakness.
Meanwhile, sterling is starting to look more vulnerable. The UK’s safe-haven
status is wearing thin. Growth is limp, the government’s deficit-reduction
plan is off track and the U.K.’s triple-A rating may fall next year; there
is a risk that future BOE governor Mark Carney’s recent musings on changes
to the UK inflation target could unsettle markets.
With sterling making up only 5% of
foreign-exchange reserves and the gilt market massively distorted by
quantitative easing, the pound could come under pressure. The currency may
fall to the low $1.50s from around $1.61 now, RBS thinks.
As for the euro, its main achievement in 2012 was to survive despite
predictions of its demise, rising to $1.32 from a low of $1.21 as the risk
premium related to the euro-zone crisis waned. But the last thing Europe
needs is an appreciating currency. If the euro reaches $1.35 to $1.40, that
could cause pain for exporters and politicians, ING thinks.
The European Central Bank could have an
unconventional tool to counter that: forcing banks to pay for the privilege
of depositing funds at the central bank by introducing a negative deposit
So far, the ECB has appeared unwilling to take
that step lightly, fearing unintended consequences.
Shinzo Abe’s newly elected government has demanded the BOJ do more to pull
Japan out of its slump.
With so much liquidity sloshing around global markets, currencies of
emerging-market countries where growth prospects may be brighter are likely
to continue to being squeezed higher. That may lead to further interventions
and efforts to stem capital flows. Currency skirmishes lie ahead.
One thing could change the race to the bottom: a pickup in U.S. growth.
Although the Fed itself seems unlikely to rush for the exit, that could lead
the market to at least ponder Fed tightening.
Ultimately, that would tilt the balance toward a
stronger dollar, opening the way to weaker currencies elsewhere.