Talk of currency wars

Placing the currency ware rhetoric in context is hard with so many different comments. BNY has done a good job of providing in one place many of the key comments. While word are cheap relative action, the comments are starting to get more aggressive.


Commentary from BNY:

On a day that may see the US label China a currency manipulator, the following headlines – taken from our briefings over the past fortnight – shed some light on the issues and tensions that have arisen amongst members of the G20 as the countdown to their meeting in South Korea gets underway.

October 1st
Brazil’s central bank governor Henrique Meirelles tells Reuters Insider that while it might be beneficial to the US economy, a second round of quantitative easing could “accentuate (global) liquidity and overflow … We cannot simply allow our economies to be imbalanced while allowing other economies to be balanced.” Mexican deputy foreign minister and G20 ‘Sherpa’ Lourdes Aranda tells Reuters that China should not be singled out over the valuation of its currency at the G20 summit in November. She says: “What you want is to have a dialogue and not to back anyone into a corner.” She adds: “What use would (G20) be if China did not go?”

October 4th
IFR Markets estimates that the authorities in Asia bought USD 18.8 Bn through intervention last week. Separately, Bank of Korea data show that FX reserves rose to a record USD 289.78 Bn in September, up from USD 285 Bn in August.

October 5th
The Brazilian government doubled the tax due on foreigners’ purchases of local fixed-income assets to 4.0% in an effort to slow the rise of the BRL.

The South Korean authorities announce that that the BOK and the Financial Supervisory Service plans to conduct inspections of FX derivative positions at selected local and foreign banks.

Dow Jones newswires cite market reports of fresh intervention in the FX markets by the South Korean authorities. Two sources tell the newswire that they estimate the buying to have been worth around USD 1 Bn.

The Bank of Thailand’s senior director with responsibility for financial markets, Wongwatoo Potirat, says that the bank is a little worried about the THB’s continued rise and says that it is studying ways that the flow of funds can be controlled. He notes: “Imposing measures is a serious matter, and we need to study both the good and bad points to see who will win or lose."

October 6th
The FT reports that IMF chief Dominique Strauss-Kahn has warned that governments are risking a currency war if they try to use exchange rates to solve domestic problems. He said “There is clearly the idea beginning to circulate that currencies can be used as a policy weapon … Translated into action, such an idea would represent a very serious risk to the global recovery … Any such approach would have a negative and very damaging longer-run impact.”

Nobel prize winning economist Joseph Stiglitz said that “The irony is that the Fed is creating all this liquidity with the hope that it will revive the American economy … It's doing nothing for the American economy, but it's causing chaos over the rest of the world. It's a very strange policy that they are pursuing.”

China’s official Xinhua news agency reports that Premier Wen Jiabao has urged the EU to treat the issue of the CNY ‘objectively and fairly’. Wen made the remarks at the same meeting with Jean-Claude Juncker, Jean-Claude Trichet and Olli Rehn. Wen reaffirmed China would continue reforms to make the CNY more flexible.

October 8th
Russian Deputy Finance Minister Dmitry Pankin says "Exchange rates are already a result of deeper processes: the propensity to savings, investment, the investment climate in a country, level of demand." He also notes: "Free float is not an exit prescription, it's not a prescription for all illnesses."

October 11th
South Korean President Lee Myung-bak says that the G20 must agree on their foreign exchange policies by their November meeting, as a failure on policy coordination could lead to big problems for the global economy.

October 12th
The China Securities Journal says (in a front-page editorial) that quantitative easing in the US will trigger a new round of asset price rises, and that continued USD depreciation will result in higher resource prices. It notes: “The financial crisis could escalate into a currency crisis … There will be no winner.” It argues: "Therefore, the best monetary policy choice currently is surely to take no action on interest rates, and at the same time manage well the pace of CNY appreciation, avoiding the impact of a rapid appreciation on the economy."

The Thai government agrees to impose a 15% withholding tax on interest and capital gains earned by foreign investors on government bonds.

Taiwan’s Economic Daily reports that the central bank will not now allow local banks to place non-deliverable forwards orders at 11 am each day.

IFR Markets estimates that the central banks of South Korea, Malaysia, Indonesia, Thailand, the Philippines and Taiwan collectively purchased USD 32. 69 Bn between September 27th and October 11th.

October 13th
When asked about South Korea's currency intervention and its place in G20, Japanese Finance Minister Yoshihiko Noda said “As chair of the G20, South Korea's role will be seriously questioned”. He added “In South Korea, intervention happens regularly, and in China, the pace of CNY reform has been slow … Our message is that we have confirmed at the Group of Seven that emerging market countries with current account surpluses should allow their currencies to be more flexible.”

Brazilian Finance Minister Guido Mantega says (regarding the impact of the decision to double the IOF tax on foreign investment in domestic sovereign bonds): “At this moment we're waiting to see if the currency will stabilize. It's possible that it happens." He adds: "If it doesn't work this time, we will be thinking about other measures." Regarding QE in the US, he notes: “I don't think it will reactivate the economy, but it will weaken the USD."

Cui Tiankai, a deputy foreign minister and China's key G20 negotiator, says (when asked whether he is worried about a spectre of a global currency war): "We are doing our best to avoid that. But it requires efforts of all the G20 members, not China alone."

October 14th
Taiwanese Financial Supervisory Commission Chairman Chen Yuh Chang states that the government will carefully evaluate any plan to tax short-term capital flows into Taiwan because of the impact foreign investment has on the stock market.

The Monetary Authority of Singapore has widened the trading band for the SGD for the first time since 2001. MAS said the band was widened “in view of the volatility across international financial markets.”

The Bank of Korea keeps interest rates unchanged but comments in a statement that moves in the foreign exchange market “are a risk to the economy” and could affect future policy decisions, noting “That is one of the factors, although we are not taking only that into account”.

Finance minister Yoon Jeung-hyun says “With the recovery slow in the advanced countries, each country relies more on exports for growth, and tension surrounding foreign exchange rates is intensifying, and there are signs that this could develop into trade protectionism”.
China Commerce ministry spokesman Yao Jian says: "It is entirely wrong for the United States to make an issue of China's trade surplus and hence put pressure on the CNY exchange rate. The CNY should not be a scapegoat for United States' domestic economic problems. "He adds that China is a responsible country and will push ahead with currency reform based on its own domestic conditions. Yao also notes that a 3% rise in the CNY ‘would place greater pressure on exporters’ and that Japan is in ‘no position’ to criticize China’s currency policy given that Japan has had a trade surplus with China for eight years.