Currency war tensions set to worsen in 2013
14 December 2012
The world’s “currency wars” are set to keep raging into 2013. Just this week, BoE’s King, RBA’s Stevens and now SNB’s Jordan have highlighted the sensitivity of policy makers to the unintended consequences of central bank balance sheet expansion. This is the modern day version of the old beggar-thy-neighbour problem that dogged the world during the Great Depression of the 1930s.
Divyang Shah, Senior IFR Strategist
BoE Governor King was the first one this week to point out that a number of countries could try to push down their exchange rates, noting the lack of a global growth engine as:
1) c/a surplus countries fail to do enough to stimulate growth
2) c/a deficit countries have limited options to deliver stimulus and
3) those that have benefited from exports struggle to limit currency strength.
What King failed to mention was that balance sheet expansion is only adding to these concerns.
Then RBA Governor Stevens fleshed out that last part of the equation, arguing that the source of much tension was an expansion of central bank balance sheets that has “created disquiet in the global policymaking community.” Stevens explained that the massive balance sheet expansion had forced capital to seek out higher returns and as a result “people in the emerging economies, and for that matter several advanced economies, feel uncomfortable about the spillovers.” ……