Bloomberg reports: "The US escalation of trade tensions won’t solve any of its problems but will create volatility in global markets and hurt the world economy, according to China’s top financial regulator. In a speech Guo Shuqing, head of China’s banking and insurance regulator delivered at a forum in Beijing on Saturday, warned [anyone] “shorting the yuan will inevitably suffer from a huge loss”, adding that it is rather “ridiculous” that developed countries have long asked for more currency flexibility, but when the yuan’s rate becomes more market oriented, some of them showed fear. Read: yuan weakness.
The trouble with foreign exchange is that it’s very much a double-edged sword, not only in terms of its effects, but also its causes. Media reports on the subject are all too often erroneous and misleading, the reporter taking a short cut, creating a narrative to match consensus thinking, or simply not having first-hand experience of the subject. An over-the-counter market, dominated by large financial institutions, nudged by central banks and politicians, money market operations are as likely to impact as are trade flows.
This year’s best-performing European currency against the US dollar (the de facto global benchmark) is the Russian rouble. Its strength is obviously not due to increased exports – thanks to sanctions. It’s the effect of policies and tactics adopted by Elvira Nabiullina, president of the central bank of the Russian Federation.
Conversely, the EU’s weakest currency has been the Swedish krona, which has lost 6 per cent of its value so far this year. Partly due to Riksbank back-pedalling on threatened interest rate rises, an inherently unstable residential property market, money-laundering in the Baltics via Scandinavia, and a manufacturing industry at risk from escalating trade spats. This trend is established and might accelerate into November.
Among emerging market casualties, the Argentine peso stands literally head-and-shoulders above its peers with an 18 per cent devaluation in 2019. A perennial problem in this nation, successive bouts of inflation (47.6 per cent in 2018) and hyper-inflation, have debased the coin and crushed the banking sector. It now faces the spectre of a Kirchner back in power: Cristina Fernández de Kirchner, coinciding with the release of her best-selling biography, announced on 25 May that she was to run as vice-president, with Peronist Alberto Fernández as president, in this October’s election.
The Turkish lira, and Turkey more generally, have struggled over the last year. Obviously, things can be held in check (interest rate rises the usual tool), weaknesses bubbling under (possibly political instability), every now and again they get thrown a lifeline or a bit of luck comes their way. Right now, I can’t see anything bright on the horizon here, so am pencilling in further lira weakness – and I know many are currently booking holidays in Bodrum and other coastal resorts.
Ironically, with a government accused of, and subject to, goodness only knows what, the best-performing emerging market currency has been the Israeli shekel. You see, it’s hard to untangle cause and effect.
After analysing these many causes, we then must look at the US dollar itself, where its index against major currencies has been relatively stable for 53 months, trading one standard deviation above the central rate of 96 today. Parties and governments come and go, rhetoric, threats, and embargoes bandied about, yet the economy runs on regardless. Plus ça change!
