Published On: Tue, Feb 24th, 2015

Currency Wars and the Race to the Bottom

It’s a day for central bankers to say what they think – or perhaps say what the politicians want them to say…. The UK’s BoE governor is hinting at interest rate rises to come, and we eagerly await what Janet Yellen will be saying over in the USA. I suspect she’ll be hinting too about an interest rate hike some time this summer, although I very much doubt if she’ll be at all specific. Market participants of course will hear what they want to hear. Some will interpret her remarks as bullish, and others, the opposite, so volatility will be on the rise this week.

In any event, come summer I reckon interest rate rises will be off the table as both the UK and the USA join the race to the bottom, currency value – wise. Just about everywhere else is reducing interest rates as they try to compete with other countries in terms of exporting. (The weaker the currency, the easier it is to export your products because other countries that import your stuff, need to pay less for it.) But of course the sting in the tail is that as your currency weakens, so your imports become more expensive, adversely affecting the balance of payments. Sweden is a good (bad?) example at the moment – its central bank is desperately trying to weaken the SEK by various means – and succeeding for the moment. We can see the effect in the Swedish stock market, where share prices have been rocketing of late as investors try to protect themselves from the falling value of their currency. It’s not going to end well, that’s for sure!

Elsewhere, the Baltic Dry Index is at record lows – partly caused of course by too much shipbuilding during the good times, but also caused by a severe reduction in the volume of world trade, especially of commodities like iron ore and coal. The Chinese in particular, have more or less ceased to build their stockpiles of these two commodities, and three big “dry bulk” shipping companies have gone bust this month. More will follow, I suspect.

The Greek mess drags on of course, with nothing resolved, whether or not they get the four month breathing space they want. They’re bust – it’s a simple as that – and their government has been forced by Brussels to toe the line in a humiliating climbdown. It’s probably only because – despite finmin Varoufakis’ fine words of defiance – they are terrified of leaving the euro. It’s a great pity the new Greek government is showing itself to be as useless as its predecessors. They had a real chance to walk away from most of their crippling levels of debt, and negotiate some kind of fair repayment schedule for the balance. Instead, they have blown any opportunity they ever had to do so, and have condemned Greek citizens to more misery for many years to come. One day I suspect they’ll come to their senses – or at least a new government might – and walk away from the euro. If not, there’s really no hope for them, and if anyone believes the Greeks will actually ever be able to repay all their debt mountain, then they’re living in a fantasy world.

Further afield, Japan’s stockmarket continues higher in a similar way to that of Sweden. The Japanese currency – the Yen – is weakening again, especially against USD, and that weakness is reflected in higher stock prices. The result of course is that only domestic investors see any benefit – although the rising stock price of your shares means “more Yen in your pocket”, you still need “more Yen” to buy the same amount of US Dollars! Japan won’t be seeing a true increase in stock valuations for a long time to come, I suspect.

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About the Author

- Ian Williams has been trading stocks, indices, forex and commodities on his own account for over 30 years. He set up a "trading training" company in 2004, and since then he has helped a large number of people to become successful traders. His hobbies are skiing and flyfishing, spending his winters in the Alps and summers in Scandinavia. He can be contacted via