The World Overall: In Depth

One Financial | Andrei Wogen| finance.wogen@gmail.com| 03-26-15

A Silent War
There is a war going on right now around the world. A covert
war that is unseen by most but which has potentially far more
reaching effects than any sort of traditional war done through
arms and people. This war is a war between currencies and
really, it is a war between central banks of the world to weaken
their currencies faster and more than the next one in order to
help prop up their economies, especially the exports sector.
So far, the Euro Zone, Australia and especially Japan have been
the three most obvious and biggest central banks to push
through policies to weaken their currencies. But they are not the
only central banks and wont be the last. As the world continues
to struggle to revive growth and inflation, a full seven years since
the financial crisis began (a daunting amount of time given the
many efforts we have seen from central banks), central banks and
governments alike are getting desperate and with increased
social unrest, partly due I think to the continued weak
fundamentals seen around the world, something needs to be
done to create sustainable growth. One of these ways that has
been approached and will be more so, as already outlined, is
through the weakening of currencies.
So the question I want to focus on in this article, is: whos next?
We have already had a few weaken their currencies but I am
expecting that more will act.
So to break this down some, first off, what type of countries
would likely be the best candidates for weakening their
currency? As I see it there are a few things to look for when
considering which countries are next. (1) the country will need to
be an export orientated country, heavily reliant on income from
exports to drive their overall economy; (2) their overall
economies should be quite weak, both in comparison to other
economies of its type and size but also on a historical basis in
comparison to their normal trend in growth; (3) their inflation
rate should be very low and/or trending lower; (4) their
currencies should be fairly well valued, not too low in value so as
to assume that the value of the currency could or is in any way
helping the economy forward and in fact, the higher the better
and (5) there needs to be some sort of animal spirits involved
either via the activity present in the markets and/or in activity
within and with the economy such as continued falling
investment or something along those lines.
So in considering these things, which countries are likely to
weaken their currencies next?

EUR/CHF Daily Strengthened after the

removal of the SNB cap but the Franc is still too
strong for the Swiss economy

The first country that comes to mind is Switzerland. Yes they

have already been down this road of trying to keep their
currency from gaining too much value and yes they ended that
campaign for reasons yet completely unclear. However, I think
they will be headed back down the road of trying to weaken their
currency via some policy change and/or mechanism of some
sort. The country is too reliant on exports and their economy and
inflation are too weak for them not to. However, instead of
weakening the currency via a floor or consistent intervention I
expect them to cut interest rates further. Currently they are in
negative territory but I think the SNB will soon be (or maybe
already is) quite desperate to stem inflows into the Franc,
especially versus the Euro, as animal spirits have taken over
causing the Franc to be sought as a safe haven currency for
investors and the wealth alike. But, whether any sort of action by
the SNB will even work will largely depend on the Euro and
what it does. The weakness in the Euro has been a big part of the
reason for the appreciation in the Franc and could very well be
the main reason for the SNB to drop their exchange rate floor.
Growth and inflation though in Switzerland remains weak
though and with the recent removal of the floor in EUR/CHF, the
conditions in the country have gotten worse and will very likely
continue to do so without some action by the SNB and/or
government.
The second country on my watch list for possible action to help
weaken their currency, is China. First off, if China does in fact
deliberately weaken their currency, this action will have affects
around the world but especially in emerging markets. But
Chinas economy is weakening, both in production and
consumption. House prices continue to fall, putting pressure on
the consumer, the loan industry continues to be reigned in,
putting pressure on pretty much everything and exports and
imports continue to suffer highlighting not only a weak global
economy but also weak domestic conditions. On the whole
though, the Chinese economy continues to suffer amid
government reforms that are being implemented. And so the
weakness in the economy will call for more easing by the central
bank to help prop things up a bit and with interest rates not
doing enough, it could be time soon for more aggressive action in
the form of weakening the Yuan. However, as already
highlighted, the risks of doing so are large indeed and not just on
the economy front but politically as well.
The third country on my watch list is Japan. While the countrys
central bank, the BoJ, has implemented quite a large program to
ease their policy and help weaken their currency (in a bid to prop
up inflation) in my opinion (and in the opinion of many) their
current actions will not be enough. With the Japanese economy
continuing to show weakness the Bank, and government too in
some ways, will have to take some sort of action to help the
economy along. However, it would appear though that the
Central Bank is unwilling to take any more action to help the
economy at this point and so when (as I dont think if is a
question anymore with Japan) the BoJ takes more action to help
the economy their action(s) will have to be quite big and drastic
in order to have any chance of doing any good. Weakening the
currency further will likely be the best way of doing this.
The last and final country on my watch list is Australia. Being a
country very much dependent on exports, particularly to China,

USD/CNY Weekly Chart Yuan has

strengthened against the USD quite a bit over
couple of years or so; is a reversal due soon?

USD/JPY Daily Chart the Yen weakened a lot

since the mid part of last year but is it enough?

the Land Down Under is indeed so at the present time in terms of

their weak growth. The RBA has already cut rates once this year
but I expect this easing path to continue as the Central Bank has
made it very clear that the high exchange rate of the Australian
Dollar, both at its current level but also likely in their
expectations of where it will go form here, is not helping the
domestic economy. This concern of the high exchange rate has
also been voiced by businesses as well. Also, with the mining
industry continuing to slow, this continues to put pressure on the
rest of the domestic economy and will likely continue to do so as
China in particular slows but also as the commodity sector as a
whole continues to wind itself down. So I expect the path of the
RBAs monetary policy to continue further, with lower rates and
subsequently, a lower currency. But, if lower rates dont help to
bring down the currency enough, at least in the Banks view, then
I expect they will weaken the currency even further via straight
intervention in the markets to weaken the currency in order to
help the economy further.
So there are the top countries that I am watching and that I think
will have the greatest effect on the markets. When these actions
are implemented is the real question though I expect that as this
year continues, more action will be seen. These four countries
though are not just the only the countries I am keeping watch.
Just the most obvious right now. But nonetheless, if the
beginning of this year gave us any indication of what is to come,
which I think it has, then the rest of this year will be an
interesting one to say the least.

Copyright 2015 by Andrei Wogen

AUD/USD Daily Chart the AUD has

weakened a lot over the past few months
but is it enough?