• International efforts to engender economic advantage to others’ detriment are growing in prominence and frequency
• What used to be competitive monetary policy events are evolving more decisively into outright currency wars
• In the opening week of 2017, a strong Dollar drive prompted brazen intervention efforts on the Chinese Yuan and Mexican Peso
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‘Currency wars’ is a strong description to use for the state of the markets, but it is increasingly appropriate given the developments in the global financial markets over the past days, weeks and months. Looking into previous years, we have seen efforts employed by countries that could have been more equitably labeled ‘competitive’. The Swiss National Bank’s effort to curb the overpowering influence of the Euro with the implimentation of a 1.2000 floor (which failed in spectacular fashion) was a clear but tolerated move. In direct intervention on behalf of the Yen by Japanese policy officials as recently as 2011, trade partners made grumbled but didn’t call the country out as they were limited efforts. And, there was China’s long-standing control over its exchange rate which drew claims of currency manipulator but not much in the way of policy response.
Heading into 2017, we have seen the rise of protectionism and the fall of cooperativism. The blame of middling growth amid massive stimulus efforts has been placed at the feet of trade partners. What’s more, these accusations are coming with increasingly bolder action. Among the most remarkable turns of wind arises from the US with the vows made by President-elect Donald Trump. Looking to act on percieved injustices to the US in global trade, the unorthodox policymaker has generated worry from investors and hits global counterparts. The Dollar’s volatility is a clear barometer for the market’s anxiety. But, perhaps the more exceptional response to the escalating US position is the blatant response to pressure of late by key global players.
Two of the more blatant moves to start 2017 were direct intervention efforts by China and Mexico. While these are not officially verified efforts, the communciation to the market was not veiled. A frequent target in US Presidential campaign, the Mexican Peso slide to a fresh record low (USD/MXN high) this past week before rumor spread through the market that the Mexican central bank was acting to shore up its currency with as much as $1 billion. The effort offered relatively little relief. In contrast, a massive 2.9 percent drop for USD/CNY – centered on the biggest two-day drop in the Chinese rate since 2005 – came with little word of effort or outlet. There is much debate over what side has prompted these more overt interludes into the market. Yet, as traders, we should concern ourselves with the ultimate results for conditions. Trading in a world of more explicit currency wars is the focus of this weekend Strategy Video.