Good morning and welcome to today’s foreign exchange market commentary on Friday, the 25th of January.
Early indications of a looming currency war are already visible. A nation can launch a stealth trade war against its trade rivals by allowing its exchange rates to dip. China has been accused of artificially keeping its currency, and therefore exports prices, low in the recent years. Skirmishes have begun as western economies fight back.
To be sure, this is dangerous business. The world economy will be at peril if countries start devaluing their currencies in an effort to destabilize their competitors. The world may witness a perilous downward spiral of prices if a full-fledged currency war breaks out, inviting global recession. A series of quantitative easing by central banks to break out of the protracted recession is the cause of the problem. Cheap money was channeled in the economy in the hope that general borrowing costs will drop and allow businesses to borrow cheaply, thereby creating jobs.
Banks however, refused to play. Worried about making bad loans, they have been hoarding cash. Businesses also refused to invest as demand remained sluggish. Endless supply of cheap money doesn’t lead to growth. Measures to stimulate demand can do the trick.
Two major economies have apparently changed tack and allowed their currencies to weaken. Japan, which has been in the deflationary maze for decades, has suddenly made the bolt to growth. Newly elected Prime Minister Shinzo Abe has ordered the central bank to double its inflation target and announced a $117 billion public spending stimulus. Abe expects to economy to grow by two percent a year.
That is however, half the story. Egged on by Japanese manufacturers, Abe the world’s third largest economy has allowed its currency to slide. Despite a 15 percent decline in the past two months, the yen is expected to weaken further.
A similar situation is playing out in Britain. Desperate to avoid a triple-dip recession, sterling has been allowed to slide, a 3.5 percent slippage has been permitted in the past couple of weeks.
Suppressing exchanges rates is risky. True, exporters gain in the short run due to better pricing power. But imports choke off as a weak currency makes them expensive. In countries like Britain and Japan that have little natural resources, this can be bad news. Since they rely mostly on imported raw materials for producing goods, expensive imports soon start pushing prices higher from ground up. Import-driven inflation starts to affect demands as well. But left with little choice, both the countries appear to be ready for the gamble to lug themselves out of recession.
CURRENCY RATES OVERVIEW
GBP/EURO – 1.1764
GBP/US$ – 1.5786
GBP/CHF – 1.4654
GBP/CAN$ – 1.5842
GBP/AUS$ – 1.5096
GBP/ZAR – 14.2402
GBP/JPY – 142.92
GBP/HKD – 12.3312
GBP/NZD – 1.8853
GBP/SEK – 10.2270
EUR: The single currency strengthened against the USD and the pound yesterday with the EUR/USD pair rising to 1.3373 as risk sentiments improved following better-than-expected jobs data from the US. Unemployment benefit claims fell by 5,000 to 330,000 in the week ended January 19, the lowest level in five years. The European Central Bank is due to publish the amount banks intend to repay from last year’s long-term refinancing option. The German Ifo reading, a measure of the country’s business climate, is due today morning and a strong print is likely to boost the euro further. The GBP/EUR pair is trading at 1.1747 now.
USD: Cable lost ground against the USD yesterday after upbeat jobs data from Washington reinforced sentiments that the US labour market is on the mend. GBP/USD broke the 1.5800 level to trade at 1.5757, partly due to heavy demand for GBP/EUR. The continued expectation that today’s UK GDP number will print in the negative territory has also weighed heavily on sterling over the past 24 hours. We have the new-home sales data for December coming out from the other side of the Atlantic today. The GBP/USD pair opens at 1.5790 this morning.
Have a great weekend!
