rahul.khanna's picture

Currency wars have begun and Japan is leading the way.

The BOJ has accelerated the JPY's fall by surprising the market, earlier by announcing above expected QE and recently by hinting delays in raising sales tax. Idea is to get people spending, and cost push inflation is the path Japan is taking. Abe however, may want to do a bit more than just raise domestic demand; we think Japan also wants to increase its share of global trade from countries like China & Korea. Also recent rumours suggest that ABE will go for a snap election in December, this will make neighbours like South Korea concerned as the Yen is likely to tumble further.

South Korea’s patience is already running thin with it expressing concerns over the JPY fall and KRW is already down on market expectation of BOK action. China on the other hand is playing it cool not trying to jump too early but underneath China is ready to act if need be and this poses a significant risk.

The ECB has talked down the EUR in the hope of growing exports and thus aid the ailing economy. The ECB has done this cleverly without any real QE but lack of growth is a big impediment and cheap currency will only provide temporary relief. The BOE has also done a similar thing with Mark Carney suggesting lower inflation and accommodative interest rates to push market expectation of a rate rise further back and in the process devaluing GBP. The RBA is the latest central bank to hint that intervention to weaken Aussie is an option.

(Daily chart - USD vs JPY, KRW & CNY, Click on image to enlarge) 

Economies around the world are desperate to increase their market share of global trade to help their weak economies. They are trying to keep and grow exports in the stagnant global economy with currency devaluation seemingly the shortest possible fix. Given these developments it seems volatility in currencies is set to rise further.