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Insight to All Things Currency and Treasury Management

Currency wars are back in the news after the central banks of several countries entered the fray last week.

Currency war battles in the Asia-Pacific

Many of the most recent currency war battles have been precipitated by Japan’s continuing aggressive monetary easing and fiscal expansion, which has pushed the yen down more than 20 percent against the dollar in the last six months. In particular:

  • New Zealand – The Reserve Bank Governor said the central bank sold the kiwi and would do so again to protect growth, prompting the New Zealand dollar to fall to a five-week low.
  • Australia – The Reserve Bank lowered its benchmark interest rate, prompting the Australian dollar to match its weakest level in two months.
  • ŸSouth Korea – The central bank lowered its benchmark rate from 2.75% to 2.5%, the first cut in seven months.

Countries in the Asia-Pacific are particularly susceptible to a weaker yen because of their close economic ties with Japan. Many of South Korea’s exporters, for example, compete directly with Japanese exporters. Given these relationships, devaluation of the yen can have significant negative impacts on the economies of these other countries, sparking the kind of competitive devaluation we’re seeing.

Currency war battles in Europe

Similarly, countries affected by the continuing weakness of the euro also took action to protect their economies from relatively strong currencies (which make their exports less competitive):

  • ŸSweden – For years the central bank staved off calls to stem the ascent of the krona, which has risen 28 percent against the euro. Last week the Swedish finance minister said he would intervene if the krona continued to strengthen.
  • Norway – Reserve Governor Oeystein Olsen has warned he’s ready to cut rates should krone strength persist.
  • Switzerland – Switzerland already caps its franc against the euro at 1.20.

The casualties

From these most recent battles, I see three significant trends that could intensify the negative impact on U.S.-based multinationals:

1)    This is a continuation of the trend that has currencies on the fringe delivering significant surprises to global corporations. The problem is that most MNCs are in so many countries around the world (many of them emerging markets) that trying to predict these impacts – against the reporting currency and between each other (cross currencies) is like a bad game of whack-a-mole.

2)    Currency wars are becoming more belligerent. Countries that just two months ago said they would not engage in currency devaluation are now doing it out of domestic economic and political necessity.

3)    Investors, analysts, boards, and senior management at a minimum want to ensure that results will not be worse than they have been historically. Yet given surprises from fringe currencies and increasingly belligerent battles, results will worsen if the company does not improve the process that created those results historically.

How are you impacted by global currency wars?

 

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