Connect with us

Trading

THE CHRONICLES OF CURRENCY WARS. PART 3: IS THERE A WINNER?

Published

on

abstract-business-concept_7

By Elizaveta Belugina, leading analyst at FBS Markets Inc., FXBAZOOKA.com

The current financial system invites so-called ‘currency wars’ between different nations: during the times of economic hardships governments seek to devalue national currencies in order to make their exports more price competitive. Once several players join the game, it provokes a chain reaction: countries which didn’t take part in the battle at first, have to join the fight as their currencies become too expensive compared to those of their neighbors – a very unpleasant thing for export-oriented economies.

As all parties are contending with the same ammunition but for contradictory goals – namely their own well-being at the expense of others – it raises an important question: who will win in this currency confrontation? Can it be that everyone wins? And are there winners at all?

The sheer fact that regulators all over the world keep easing monetary policy means that the existing measures are not enough: the economies suffer, so there’s a need for additional stimulus. Some economists even don’t rule out the possibility of QE4 in the United States.

Monetary easing – both conventional and unconventional – is a real mayhem these days. Here’s the list of the central banks which lowered the benchmark interest rates since the beginning of 2015: Romania (4), India (3), Switzerland, Egypt, Peru, Denmark, Turkey (2), Canada, Pakistan (3), Albania, Russia (4), Australia (2), Sweden (2), Indonesia, Israel, China (4), Poland, Thailand (2), South Korea (2), Serbia (4), Hungary (4), Sri Lanka, New Zealand, and Norway – the list is quite impressive. All in all, since Lehman Brothers collapse central banks have lowered interest rates more than 570 times. The European Central Bank has resisted monetary stimulus for a long time, but eventually even Mario Draghi had to give green light to the quantitative easing (QE).

Let’s have a look at some countries’ Real Effective Exchange Rates (REER), which provide a measure of their export competitiveness: a rise in the index implies a fall in competitiveness, and vice versa.

real effective exchange rate

Source: BIS

As you may see from the chart above, quantitative easing helped to increase the US competitiveness in 2009-2011. However, as the Federal Reserve ended the third round of asset purchase program in 2014, US dollar’s REER went up. This represents a negative factor for American economy showing the most dangerous thing about the loose monetary policy: once you start it, it’s very difficult to turn it off, because the economy, the stock market and practically everyone become too used to the cheap money. This addition not only creates an ever-present risk of uncoiling inflation, but also raises a vicious circle of constant easing and currency wars.

If there are winners, there should be losers. As one currency weakens, other currencies inevitably rise. It’s evident that hot money poured out of the US to emerging market economies like Brazil making its national currency appreciate. That’s why the country had a huge loss of competitiveness during the same period. Big monetary inflow made asset and food prices in Brazil rise magnifying inflation. Even now high inflation prevents Brazil from joining other central banks in cutting interest rates with full force. And when the US finally raises interest rates, it will cause more of the violent capital flows, but in other direction, and it won’t be pretty.

It’s clear that the world’s financial system requires more and more monetary stimulus. Central banks cut interest rates and buy their own governments’ bonds in order to print extra money and hold interest rates at the record lows thus stimulating demand and investment. Moreover, weaker national currencies help to devalue huge public debts. All in all, the aim itself is good, but the road to hell is paved with good intentions. The problem is that QE increases exchange rate volatility. As a result, international companies have to hedge more, and the cost of cross border transactions rises. Foreign direct investment also suffers, and financing becomes more expensive for countries with current account deficits. Excessive expenses are a burden for economic growth. All in all, the state of currency wars complicates co-operation of economic and trade partners creating barriers in their way.

Elizaveta Belugina

Elizaveta Belugina

Aren’t there other ways to encourage economic growth other than the loose monetary policy? Of course, there are. But quantitative easing offers quicker results. As most advanced economies suffer from low inflation and subdued economic growth, it’s natural for their central banks to conduct loose monetary policy which is debasing the currencies. What the nations don’t realize is that they are singing a deal with the Devil and that it will be very difficult to get off the hook.

To sum up, in the short-term there are some winners and losers of currency wars: countries which manage to achieve acceleration in growth, and countries which are hurt because their competitors have made their own exports cheaper. In the long term quantitative easing causes plenty of problems for everyone. So far what we have seen is that one round of currency war provokes the next one.

According to Josef Stiglitz, currency wars have no winners. The gains of a county which is devaluing its currency look smaller than the losses of the other countries which are hit by the consequences of such policy. As all nations are tied up together in the globalized word, these small gains tend to evaporate with time as countries suffer from the troubles of their partners. This wise economist warns that in 1930s policies aimed to hurt the neighboring countries made the Great Depression last longer. Stiglitz offers an alternative way –global co-operation based on structural reforms, economic stimulus and long-term institutional changes in the global monetary system. The US as the owner of the world’s main reserve currency and the originator of currency wars in the first place should play the leading role in making the various nations cease monetary fire. To establish the currency peace America has to demonstrate a positive example by pioneering high productivity investments and wage increases. This is not the easiest way, and it will take time before the policymakers finally realize that this is the best solution. Until then currency wars will keep rocking the world economy preventing it from sustainable growth.

Trading

FTSE Russell to include 11 stocks from China’s STAR Market in global benchmarks

Published

on

FTSE Russell to include 11 stocks from China's STAR Market in global benchmarks 1

SHANGHAI (Reuters) – Index provider FTSE Russell will add 11 stocks from China’s STAR Market to its global benchmarks, according to a post on its website from Friday.

The move marks the first time shares from Shanghai’s Nasdaq-style STAR Market for stocks in China have been included in a global index.

The 11 stocks include Raytron Technology Co Ltd, Zhejiang HangKe Technology Co Ltd, Montage Technology Co Ltd, Advanced Micro-Fabrication Equipment Inc China.

(Reporting by Josh Horwitz and Samuel Shen in Shanghai; Editing by William Mallard)

Continue Reading

Trading

UK insurers estimate to pay up to 2.5 billion pounds for coronavirus claims

Published

on

UK insurers estimate to pay up to 2.5 billion pounds for coronavirus claims 2

(Reuters) – The Association of British Insurers (ABI) said on Saturday insurers are likely to pay up to 2.5 billion pounds ($3.50 billion) for UK’s COVID-19 insurance claims incurred in 2020.

The latest estimates include 2 billion pounds for COVID-19 business interruption claims and 500 million pounds for COVID-19 related protection insurance claims, travel insurance claims and other general insurance products.

ABI’s Director General Huw Evans said in a release that the pandemic illustrated some uncomfortable gaps between what people expected to be covered for and what their policy was designed for.

“We need to learn lessons from this unprecedented event and redouble our efforts to improve consumers’ trust in insurance products,” he added.

The insurance trade body said 123,000 claims have been settled with payment so far and a further 9,000 have received partial payments as of mid-January 2021.

($1 = 0.7139 pounds)

 

(Reporting by Maria Ponnezhath in Bengaluru; Editing by Marguerita Choy)

 

Continue Reading

Trading

Oil extends losses as Texas prepares to ramp up output after freeze

Published

on

Oil extends losses as Texas prepares to ramp up output after freeze 3

By Devika Krishna Kumar

NEW YORK (Reuters) – Oil prices fell for a second day on Friday, retreating further from recent highs, as Texas energy companies began preparations to restart oil and gas fields shuttered by freezing weather and power outages.

Brent crude futures ended the session down $1.02, or 1.6%, at $62.91 a barrel while U.S. West Texas Intermediate (WTI) crude fell $1.28, or 2.1%, to settle at $59.24.

For the week, Brent gained about 0.5% while WTI fell about 0.7%.

This week, both benchmarks had climbed to the highest in more than a year.

“Price pullback thus far appears corrective and is slight within the context of this month’s major upside price acceleration,” said Jim Ritterbusch, president of Ritterbusch and Associates.

Unusually cold weather in Texas and the Plains states curtailed up to 4 million barrels per day (bpd) of crude production and 21 billion cubic feet of natural gas, analysts estimated.

U.S. energy firms this week cut the number of oil rigs operating for the first time since November, according to Baker Hughes data.

Texas refiners halted about a fifth of the nation’s oil processing amid power outages and severe cold.

Companies were expected to prepare for production restarts on Friday as electric power and water services slowly resume, sources said.

“While much of the selling relates to a gradual resumption of power in the Gulf coast region ahead of a significant temperature warmup, the magnitude of this week’s loss of supply may require further discounting given much uncertainty regarding the extent and possible duration of lost output,” Ritterbusch said.

Oil prices fell despite a surprise drop in U.S. crude stockpiles last week, before the big freeze hit. Inventories fell 7.3 million barrels to 461.8 million barrels, their lowest since March, the Energy Information Administration reported on Thursday. [EIA/S]

“Vaccines and the impressive rollouts we’ve seen have delivered strong gains, as have the efforts of OPEC+ – Saudi Arabia, in particular – and the big freeze in Texas, which gave oil prices one final kick this week,” Craig Erlam, senior market analyst at OANDA, said.

“With so many bullish factors now priced in, it seems we’re seeing some of these positions being unwound.”

The United States on Thursday said it was ready to talk to Iran about returning to a 2015 agreement that aimed to prevent Tehran from acquiring nuclear weapons. Still, analysts did not expect near-term reversal of sanctions on Iran that were imposed by the previous U.S. administration.

“This breakthrough increases the probability that we may see Iran returning to the oil market soon, although there is much to be discussed and a new deal will not be a carbon-copy of the 2015 nuclear deal,” said StoneX analyst Kevin Solomon.

(Additional reporting by Ahmad Ghaddar in London and Roslan Khasawneh in Singapore and Sonali Paul in Melbourne; Editing by Marguerita Choy, David Gregorio and Nick Macfie)

Continue Reading
Editorial & Advertiser disclosureOur website provides you with information, news, press releases, Opinion and advertorials on various financial products and services. This is not to be considered as financial advice and should be considered only for information purposes. We cannot guarantee the accuracy or applicability of any information provided with respect to your individual or personal circumstances. Please seek Professional advice from a qualified professional before making any financial decisions. We link to various third party websites, affiliate sales networks, and may link to our advertising partners websites. Though we are tied up with various advertising and affiliate networks, this does not affect our analysis or opinion. When you view or click on certain links available on our articles, our partners may compensate us for displaying the content to you, or make a purchase or fill a form. This will not incur any additional charges to you. To make things simpler for you to identity or distinguish sponsored articles or links, you may consider all articles or links hosted on our site as a partner endorsed link.

Call For Entries

Global Banking and Finance Review Awards Nominations 2021
2021 Awards now open. Click Here to Nominate

Latest Articles

FTSE Russell to include 11 stocks from China's STAR Market in global benchmarks 4 FTSE Russell to include 11 stocks from China's STAR Market in global benchmarks 5
Trading2 hours ago

FTSE Russell to include 11 stocks from China’s STAR Market in global benchmarks

SHANGHAI (Reuters) – Index provider FTSE Russell will add 11 stocks from China’s STAR Market to its global benchmarks, according...

Foxconn chairman says expects "limited impact" from chip shortage on clients 6 Foxconn chairman says expects "limited impact" from chip shortage on clients 7
Business2 hours ago

Foxconn chairman says expects “limited impact” from chip shortage on clients

TAIPEI (Reuters) – The chairman of Apple Inc supplier Foxconn said on Saturday he expects his company and its clients...

Bitcoin, ether hit fresh highs 8 Bitcoin, ether hit fresh highs 9
Top Stories2 hours ago

Bitcoin, ether hit fresh highs

SINGAPORE (Reuters) – Bitcoin hit a fresh high in Asian trading on Saturday, extending a two-month rally that saw its...

UK insurers estimate to pay up to 2.5 billion pounds for coronavirus claims 10 UK insurers estimate to pay up to 2.5 billion pounds for coronavirus claims 11
Trading2 hours ago

UK insurers estimate to pay up to 2.5 billion pounds for coronavirus claims

(Reuters) – The Association of British Insurers (ABI) said on Saturday insurers are likely to pay up to 2.5 billion...

Citigroup considering divestiture of some foreign consumer units - Bloomberg Law 12 Citigroup considering divestiture of some foreign consumer units - Bloomberg Law 13
Banking2 hours ago

Citigroup considering divestiture of some foreign consumer units – Bloomberg Law

(Reuters) – Citigroup Inc is considering divesting some international consumer units, Bloomberg Law reported on Friday, citing people familiar with...

World Bank pushing for standard vaccine contracts, more disclosure from makers 14 World Bank pushing for standard vaccine contracts, more disclosure from makers 15
Top Stories2 hours ago

World Bank pushing for standard vaccine contracts, more disclosure from makers

By Andrea Shalal WASHINGTON (Reuters) – The World Bank is working to standardize COVID-19 vaccine contracts that countries are signing...

Google to evaluate executive performance on diversity, inclusion 16 Google to evaluate executive performance on diversity, inclusion 17
Top Stories2 hours ago

Google to evaluate executive performance on diversity, inclusion

By Paresh Dave (Reuters) – Alphabet Inc’s Google will evaluate the performance of its vice presidents and above on team...

EU seeks alliance with U.S. on climate change, tech rules 18 EU seeks alliance with U.S. on climate change, tech rules 19
Business2 hours ago

EU seeks alliance with U.S. on climate change, tech rules

By Sabine Siebold and Kate Abnett BERLIN (Reuters) – Europe and the United States should join forces in the fight...

Oil extends losses as Texas prepares to ramp up output after freeze 20 Oil extends losses as Texas prepares to ramp up output after freeze 21
Trading2 hours ago

Oil extends losses as Texas prepares to ramp up output after freeze

By Devika Krishna Kumar NEW YORK (Reuters) – Oil prices fell for a second day on Friday, retreating further from...

Dollar edges lower as investors favor higher-risk currencies 22 Dollar edges lower as investors favor higher-risk currencies 23
Investing2 hours ago

Dollar edges lower as investors favor higher-risk currencies

By Stephen Culp NEW YORK (Reuters) – The dollar lost ground on Friday as market participants favored currencies associated with...

Newsletters with Secrets & Analysis. Subscribe Now