“Currency wars” are all the rage right now.In Japan, Switzerland, and the U.K., currencies are rapidly falling, and many are accusing these countries of purposely depressing their currencies in order to boost exports at the expense of other nations.
One could argue that this is the case in Japan. However, reality may be decidedly less exciting.
In a note to clients this morning, Goldman Sachs analyst Kamakshya Trivedi says the evidence points to a much more basic phenomenon: these countries are simply trying to boost stagnant economies via monetary easing.
The title of Trivedi’s report is perfect: Currency Wars? No, Just Monetary Easing.
It’s true that a side-effect of these monetary actions actions is, of course, a weaker currency – but that’s only a secondary phenomenon.
The real story is the attempt by various countries (notably Japan) to lower real interest rates, writes Trivedi:
“Exhibit A” in this argument is the behaviour of real rates. It is not simply that currencies have moved – real interest rates have declined significantly in Japan and in the UK over this period as well. In Japan real rates – measured as the difference between nominal 10year yields and 10year inflation swaps – have fallen from about +0.46% at the start of October 2012 to 0.18% currently. This is part of what Dominic Wilson has described as the most serious repricing of Japan’s future price level since the economy entered the ‘liquidity trap’ (see The market consequences of exiting Japan’s liquidity trap, GEW 13/05, February 2013).
In the UK, while real rates were already negative, they have declined further since the start of October – falling from 1.1% to 1.4%. Real mortgage fixed rates have also been declining in the UK over this period as the ‘Funding for Lending’ policy appears to have gained traction, at least in the residential secured lending market. The absence of a liquid inflation market in Switzerland makes it harder to gain a sense of shifts in real rates directly, but here too there has been a modest steepening in nominal curves, consistent with a bout of monetary easing.
Furthermore, when one drills down to the sector level of these countries’ stock markets, it becomes evident that competitive devaluation isn’t the only story (emphasis added):
“Exhibit B” is the behaviour of equity sectors underneath the headline stock market indices. If “currency wars” were the only thing going on, then we would expect to see the stock market indices in places such as Japan, the UK and Switzerland being boosted by the exportfacing sectors. However, while typically export-oriented parts of the market (such as Industrials, Tech or Materials) have done well, they have generally been bested by the more domestic cyclical parts of the market (such as Consumer Discretionaries and Financials).
In Japan, for example, an equally weighted combination of industrials and tech companies has increased +28% since October, whereas an equally weighted combination of consumer discretionary and financial companies has increased by a much greater extent (+44%). Similarly, in Switzerland, an equally weighted combination of consumer discretionaries and financials (+27%) has outperformed a combination of industrials and materials (+15%) over this period. And in the UK, a combination of consumer discretionary and financials (+19%) has outperformed industrials and materials (+10%) since October.
In a testimony before the European Parliament yesterday, European Central Bank President Mario Draghi basically said the same thing: “Most of the exchange rate movements that we have seen were not explicitly targeted, they were the result of domestic macro economic policies meant to boost the economy…In this sense, I find really excessive any language referring to currency wars.”
It’s true that monetary easing in developed economies is causing currency depreciation. However, to characterise global policymakers as engulfed in a “currency war” is missing the point about what these countries are trying to do.
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