Insight to All Things Currency and Treasury Management

In 2012 we saw countries from the United States and Switzerland to Japan, Brazil, China, and many others, engage in competitive devaluation in an effort to bolster their economies (a relatively weak currency makes that country’s exports relatively cheaper – and more competitive in the global market). In 2013, more countries will join the fray. Brazilian finance minister Guido Mantega well articulated the rationale: “If the whole world is going to manipulate their exchange rates, we will too.”[1]

While competitive devaluation does have the effect of bolstering a country’s economy, the currency wars going on now are politically driven, and political rhetoric fuels volatility. Senior Japanese leaders, for example, have been “unusually explicit” in saying that they are committed to keep the yen above ¥85 to the U.S. dollar.[2] In fact, a commitment to yen-weakening policies was a centerpiece of newly elected Prime Minister Shinzo Abe’s campaign.

But as currency manipulation in Brazil, Japan, and elsewhere affects those countries’ trading partners, other countries are likely to “copycat” the policy in order to keep their own exports competitive. That will lead to an increase in currency volatility. And increased volatility will potentially impact most line items on multinational corporations’ income statements, making politically driven currency volatility increasingly material for them.

NOTE: This is the first of a series of three themes we are watching in 2013. Stay tuned for my upcoming post on the second theme.

On January 23rd at 2pm ET FiREapps is hosting a webinar, “Managing Currency Risk in 2013” where you’ll get actionable insights into intensifying global currency wars and other macroeconomic trends that are driving volatility this year. The webinar will also include a discussion around what leading multinational corporates are doing to prepare for this volatility with timely, accurate and complete visibility into their fast-changing currency risks.

[1] Financial Times, “Brazil admits tight hold over exchange rate,” 24 Oct 2012.

[2] The Wall Street Journal, “Japan’s Call for Weaker Yen Spurs Talk of Copycat Moves,” 27 Dec 2012.