The World Overall: In Depth One Financial | Andrei Wogen| finance.wogen@gmail.com| 03-26-15

A Silent WarThere is a war going on right now around the world. A covert war that is unseen by most but which has potentially far more reaching effects than any sort of traditional war done through arms and people. This war is a war between currencies and really, it is a war between central banks of the world to weaken their currencies faster and more than the next one in order to help prop up their economies, especially the exports sector. So far, the Euro Zone, Australia and especially Japan have been the three most obvious and biggest central banks to push through policies to weaken their currencies. But they are not the only central banks and won’t be the last. As the world continues to struggle to revive growth and inflation, a full seven years since the financial crisis began (a daunting amount of time given the many efforts we have seen from central banks), central banks and governments alike are getting desperate and with increased social unrest, partly due I think to the continued weak fundamentals seen around the world, something needs to be done to create sustainable growth. One of these ways that has been approached and will be more so, as already outlined, is through the weakening of currencies. So the question I want to focus on in this article, is: who’s next? We have already had a few weaken their currencies but I am expecting that more will act. So to break this down some, first off, what type of countries would likely be the best “candidates” for weakening their currency? As I see it there are a few things to look for when considering which countries are next. (1) the country will need to be an export orientated country, heavily reliant on income from exports to drive their overall economy; (2) their overall economies should be quite weak, both in comparison to other economies of its type and size but also on a historical basis in comparison to their “normal” trend in growth; (3) their inflation rate should be very low and/or trending lower; (4) their currencies should be fairly well valued, not too low in value so as to assume that the value of the currency could or is in any way helping the economy forward and in fact, the higher the better and (5) there needs to be some sort of animal spirits involved either via the activity present in the markets and/or in activity within and with the economy such as continued falling investment or something along those lines. So in considering these things, which countries are likely to weaken their currencies next?

EUR/CHF Daily — Strengthened after the removal of the SNB cap but the Franc is still too

strong for the Swiss economy

The first country that comes to mind is Switzerland. Yes they have already been down this road of trying to keep their currency from gaining too much value and yes they ended that campaign for reasons yet completely unclear. However, I think they will be headed back down the road of trying to weaken their currency via some policy change and/or mechanism of some sort. The country is too reliant on exports and their economy and inflation are too weak for them not to. However, instead of weakening the currency via a floor or consistent intervention I expect them to cut interest rates further. Currently they are in negative territory but I think the SNB will soon be (or maybe already is) quite desperate to stem inflows into the Franc, especially versus the Euro, as animal spirits have taken over causing the Franc to be sought as a safe haven currency for investors and the wealth alike. But, whether any sort of action by the SNB will even work will largely depend on the Euro and what it does. The weakness in the Euro has been a big part of the reason for the appreciation in the Franc and could very well be the main reason for the SNB to drop their exchange rate floor. Growth and inflation though in Switzerland remains weak though and with the recent removal of the floor in EUR/CHF, the conditions in the country have gotten worse and will very likely continue to do so without some action by the SNB and/or government. The second country on my watch list for possible action to help weaken their currency, is China. First off, if China does in fact deliberately weaken their currency, this action will have affects around the world but especially in emerging markets. But China’s economy is weakening, both in production and consumption. House prices continue to fall, putting pressure on the consumer, the loan industry continues to be reigned in, putting pressure on pretty much everything and exports and imports continue to suffer highlighting not only a weak global economy but also weak domestic conditions. On the whole though, the Chinese economy continues to suffer amid government reforms that are being implemented. And so the weakness in the economy will call for more easing by the central bank to help prop things up a bit and with interest rates not doing enough, it could be time soon for more aggressive action in the form of weakening the Yuan. However, as already highlighted, the risks of doing so are large indeed and not just on the economy front but politically as well.The third country on my watch list is Japan. While the country’s central bank, the BoJ, has implemented quite a large program to ease their policy and help weaken their currency (in a bid to prop up inflation) in my opinion (and in the opinion of many) their current actions will not be enough. With the Japanese economy continuing to show weakness the Bank, and government too in some ways, will have to take some sort of action to help the economy along. However, it would appear though that the Central Bank is unwilling to take any more action to help the economy at this point and so when (as I don’t think “if” is a question anymore with Japan) the BoJ takes more action to help the economy their action(s) will have to be quite big and drastic in order to have any chance of doing any good. Weakening the currency further will likely be the best way of doing this.The last and final country on my watch list is Australia. Being a country very much dependent on exports, particularly to China,

USD/JPY Daily Chart — the Yen weakened a lot since the mid part of last year but is it enough?

USD/CNY Weekly Chart — Yuan has strengthened against the USD quite a bit over couple of years or so; is a reversal due soon?

the Land Down Under is indeed so at the present time in terms of their weak growth. The RBA has already cut rates once this year but I expect this easing path to continue as the Central Bank has made it very clear that the high exchange rate of the Australian Dollar, both at its current level but also likely in their expectations of where it will go form here, is not helping the domestic economy. This concern of the high exchange rate has also been voiced by businesses as well. Also, with the mining industry continuing to slow, this continues to put pressure on the rest of the domestic economy and will likely continue to do so as China in particular slows but also as the commodity sector as a whole continues to wind itself down. So I expect the path of the RBA’s monetary policy to continue further, with lower rates and subsequently, a lower currency. But, if lower rates don’t help to bring down the currency enough, at least in the Bank’s view, then I expect they will weaken the currency even further via straight intervention in the markets to weaken the currency in order to help the economy further. So there are the top countries that I am watching and that I think will have the greatest effect on the markets. When these actions are implemented is the real question though I expect that as this year continues, more action will be seen. These four countries though are not just the only the countries I am keeping watch. Just the most obvious right now. But nonetheless, if the beginning of this year gave us any indication of what is to come, which I think it has, then the rest of this year will be an interesting one to say the least.

Copyright © 2015 by Andrei Wogen

AUD/USD Daily Chart — the AUD has weakened a lot over the past few months

but is it enough?