QE3 triggers fear of new currency wars! What it means?

A man watches the foreign currencies exchange rate in Rio de Janeiro, Brazil

Fear has crept into the foreign exchange markets: fear of central banks. Currency traders are rapidly shifting assets to countries seen as less likely to try to weaken their currencies, amid concern that the fresh round of US monetary easing could trigger another clash in the “currency wars”.

Fund managers are rethinking their portfolios in the belief that “QE3” – the Federal Reserve’s third round of quantitative easing – will weaken the dollar and trigger sharp gains in emerging market currencies. Such moves would cause a headache for central banks worried about the domestic impact of a strengthening local currency, leading to possible intervention.

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Some investors are allocating money towards countries with beaten-up currencies, such as India or Russia, or those with more benign central banks, such as Mexico, that do not have a history of frequent forex intervention.

Currencies whose central banks have either intervened or threatened to intervene since QE3 have been underperforming the US dollar as investors have steered clear.

The Czech koruna is the worst-performing major currency against the dollar since QE3 was launched this month, according to a Bloomberg list of expanded major currencies. The governor of the Czech central bank last week raised the prospect of forex intervention as a tool to stimulate the economy.

The Brazilian real is also weaker in the past two weeks after Guido Mantega, finance minister, made it clear that the government would defend the real from any fresh round of currency wars sparked by the Fed’s move.

Even the Japanese yen is weaker against the dollar overall since the Fed’s move, despite having clawed back all its losses after the Bank of Japan’s move to add to its bond-buying programme last week.

Currency desks at Baring Asset Management and Amundi are avoiding the Brazilian real, which the country’s central bank keeps managed at around R$2 against the US currency, and are instead buying the Mexican peso, where the central bank has signalled it is happy for the currency to appreciate further.

James Kwok, head of currency management at Amundi, said: “Mexico is an emerging market currency many managers like as they believe the central bank won’t intervene. The Singapore dollar and the Russian rouble are managed by a range, instead of one-way direction, and so are also good candidates for QE play.”

He is concerned that another “big scale” intervention from Tokyo is on the cards after the BoJ failed to weaken the yen substantially this month, and is avoiding the currency as a result.

“We definitely take the intervention risk into account when investing in a currency,” says Dagmar Dvorak, director of fixed income and currency at Barings. “In Asia, intervention risk is fairly high. We have still got positions in the Singapore dollar but remain cautious on the rest of the region.”

Other investors are opting for currencies that have weakened substantially this year. Clive Dennis, head of currencies at Schroders, says: “Russia and India have currencies with strong rate support and levels which remain well below their best levels of the last year, hence pose less intervention risk. I like owning those currencies in a US QE3 environment.”

Some currencies are strengthening on a combination of Fed easing and domestic factors. While the Indian central bank is not seen as likely to intervene to stem any appreciation in the rupee, the currency has also been popular this month due to a reform package from the Indian government aimed at stimulating the economy.

Commodity currencies including the Russian rouble are responsive to expectations of a rise in commodity prices fuelled by Fed easing, while investors view the Mexican peso, along with the Canadian dollar, as a play on any economic recovery in the US because of their strong trade links.

However, some investors believe the QE3 effect could be lower this time. They argue that central banks in emerging markets face a tough decision over whether to weaken their currencies to help struggling exporters and stimulate growth, or allow them to strengthen to offset the impact of rising food prices.

In fact, the US dollar has shown signs of resilience since QE3 as fears over the health of the eurozone continue.

While flows into EM debt and equity funds rose substantially last week, according to data from EPFR Global, Cameron Brandt, research director, says this week’s flows looked more muted: “There’s a certain amount of reaction fatigue setting in.

By Alice Ross, FT.com

What QE3 means for China and rest of Asia?

 

China recently announced plans to boost spending on subways and other transportation infrastructure to boost its economy. But China may not be as aggressive with stimulus as the Federal Reserve and European Central Bank.

NEW YORK (CNNMoney) -- Peter Pham, a capital market specialist and entrepreneur with expertise in institutional sales and trading, is the author of AlphaVN.com, an investing blog focusing on Vietnam and other markets in Southeast Asia
 
Now that most of the developed world's major central banks have all committed to some form of open-ended quantitative easing, we can start to make some concrete predictions about the effects this will have in Asia.

In general, QE is being undertaken in the West to stabilize debt markets that are deflating. So this may do little to actually stimulate sustainable economic growth. But, the uncertainty as to whether the central banks would act aggressively kept a lid on many emerging growth markets for months. Here's what may happen next.

China has been lowering interest rates but it cannot afford to do print money to buy bonds like other central banks have done. China's central bank can still announce more fiscal stimulus due to its strong trade surplus. The recent plan to spend $156 billion on domestic infrastructure is significant, but compared to the amount of money the Federal Reserve and European Central Bank may wind up spending, it might was well be $156.

The political situation in China is proving to be more volatile than we may have originally thought as the response to Japan's buying the Senkaku islands seems completely out of proportion with the level of threat or even insult this is represents. It speaks to a party that needs to redirect anger at its own mishandling of the economy.

That this is coming just a few months after Japan and China signed the most sweeping currency and trade agreement of any that China has signed with another country seems very odd.

Japan's response to the QE announcement by the Fed was to extend their existing QE program another 10 trillion Yen (~$128 billion US). That may sound like a lot but it's even less than China's most recent stimulus program.

This suggests that the Bank of Japan is uninterested in printing to oblivion at the same rate as the Fed and ECB, and that Japan will manage the yen's rise while shifting its focus towards more regional trade. Japan and China are each other's largest trading partners, which makes this row over the Senkaku Islands seem manufactured to force the Japanese to choose a side in the growing cold war between the U.S. and China.

So far, Japan has been trying to work with both sides. It is helping to internationalize China's yuan currency and is giving China a clear alternative to U.S. Treasuries with its own bonds. At the same time, Japan has stepped up its purchase of Treasuries, buying more than $200 billion's worth in the past 12 months.

I expect the Bank of Japan to continue to try and position the yen as an alternative regional reserve currency as other Asian nations like Thailand, Malaysia and Indonesia try to lessen their reliance on the U.S. economy.

By keeping the yen strong versus the euro and the dollar, Japan can attract capital from overseas and use it to deploy it around Asia. There should be enough money sloshing around the region so that Asian nations can continue their trade with the West at current levels while also focusing more on regional growth.

The economies of Indonesia, Thailand and Malaysia are already growing above expectations this year despite volatility in their currencies because of the fear over Europe. With worries about Europe starting to wane, these countries, as well as the best companies in them, should have little trouble raising capital through bond sales.

The wildcards for Asia are Hong Kong and Singapore. We're already seeing signs of a property bubble in Hong Kong thanks to the Fed's four-year old policy of interest rates near zero. That's because Hong Kong's dollar is nominally pegged to the U.S. dollar.

Now that the Fed has implemented a program that will further debase the dollar -- and expand its already bloated balance sheet -- Hong Kong is being forced to reassess its currency peg. If they do not make changes, this could result in an even bigger property bubble. That would lead to loan problems for Hong Kong banks similar to those plaguing those in the U.S., Europe, China and, to a lesser extent, Singapore.

Since the Monetary Authority of Singapore (MAS) pegs its interest rates to that of the Fed, its economy is vulnerable to a property bubble like the one in Hong Kong. Inflation is currently above 4% and has recently been above 5%. While Singapore's banks are all very well capitalized and their foreign exchange reserves are higher than their annual GDP, the Fed's QE3 policy will put pressure on an economy already dealing with sluggish growth.

But all in all, the latest round of QE is mostly bullish for Asia as it creates some certainty after the past 12 months of extreme uncertainty. Even though the actions by central banks in the West appear to indicate that their economies are worse than the headlines make it seem, the mere fact that the Fed and ECB have acted should reassure investors throughout Asia.

By Peter Pham @CNNMoneyInvest
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New global currency wars warning!

New global currency wars warning!

The recent money-pumping measure by the United States has been criticised by Brazil as a protectionist move which will adversely affect developing countries.

THE recent announcement by US Federal Reserve chief Ben Bernanke that the United States would be renewing its pumping of money into the banking system has been acclaimed by some parties as a move to revive its faltering economy.

But the Fed’s measure to revive “quantitative easing” is not being welcomed by all. It has instead caused anxiety in some developing countries.

Their fear is that a large part of the massive amounts of money being unleashed into the financial markets may fail to boost the US economy but will find its way as unwanted capital flows into some developing countries.

Bernanke announced that the Fed would purchase US$40bil (RM124bil) per month of mortgage-linked assets from the market, and do so continuously until the jobs situation improves.

The hope is that cheap and abundant money will encourage entrepreneurs and consumers to spend more and spark a recovery.

However, previous rounds of such quantitative easing did not do much for the US economy.

A large part of the extra funds were placed by investors not in new US production but as speculative funds in emerging markets or in the commodity markets, in search of higher returns.

In developing countries that received the funds, adverse effects included an inflation of prices of property and other assets, as well as appreciation of their currencies which made their exports less competitive.

On the other hand, the US dollar depreciated because of the increased supply of US dollars and the reduced interest rates, making US exports more competitive.

Brazil has been in the forefront of developing countries that are critical of the US money pumping. Last week, the Brazilian finance minister Guido Mantega called the US Fed measure a “protectionist” move that would re-ignite global currency wars.

Mantega told the Financial Times that the third round of quantitative easing would only have a marginal benefit in the United States as the already high liquidity in the United States is not going into production.

Instead, it is really aimed at depressing the dollar and boosting US exports.

Japan has also decided to expand its own quantitative easing programme in response to the US move, and this is evidence of tensions and a currency war, said Mantega.

In previous rounds of liquidity expansion in recent years, Brazil has been one of the developing countries adversely affected by sharp currency appreciation, which reduced its export competitiveness and facilitated import increases.

Recently, Brazil’s currency, the real, has weakened from the high of 1.52 real to the dollar to the present two real, which has improved its competitiveness.

But the new liquidity expansion in the United States may again cause a flood of funds to enter Brazil and reverse the currency trend.

In such a situation, Brazil may be forced to take measures to stop the real from appreciating, said the minister.

Previously, the country had taken capital controls to discourage inflows of foreign funds.

What has irritated Brazil even more is an accusation by the US Trade Representative Ron Kirk that Brazil has become protectionist in raising some tariffs, even though the Brazilian measures were within its rights in the WTO framework.

Brazil’s Foreign Minister Antonio Patriota last week wrote to Kirk pointing out the unfairness of a protectionist US accusing Brazil of protectionism.

“The world has witnessed massive monetary expansion and the bailout of banks and industrial companies on an unprecedented scale, implemented by the United States and other developed countries,” said Patriota.

“As a result, Brazil has had to cope with an artificial appreciation of its currency and with a flood of imported goods at artificially low prices.”

He pointed out that the United States was a major beneficiary, as it almost doubled its exports to Brazil from US$18.7bil (RM58bil) to US$34bil (RM105bil) from 2007 to 2011.

“While you refer to WTO-consistent measures adopted by Brazil, we, on our side, worry about the prospect of continued illegal subsidisation of farm products by the United States, which impact Brazil and other developing countries, including some of the poorest countries in Africa.

“The US has managed in a short period to remarkably increase its exports to Brazil and continues to reap the benefits of our expanding market. But it would be fairer if those increases took place in an environment not distorted by exchange rate misalignments and blatant Government support”.

As the quantitative easing from the United States and Japan is only going to take effect in future, it remains to be seen whether history will repeat itself – it will have minimal effect on the United States and Japanese economic recovery but will cause problems for developing countries – or whether it will be different this time.

GLOBAL TRENDS By MARTIN KHOR

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US Growing Unemployed: A Case of Benign Neglect

Photo: REUTERS/Shannon Stapleton

The political power of the working class has diminished in recent decades, and that helps to explain why US politicians have not paid enough attention to the unemployment problem.

The high unemployment rate ought to be a national emergency. There are millions of people in need of jobs. The lost income as a result of the recession totals hundreds of billions of dollars annually, and the longer the problem persists, the more permanent the damage becomes. Why doesn’t the unemployment problem get more attention? Why have other worries such as inflation and debt reduction dominated the conversation instead? As I noted at the end of my last column, the increased concentration of political power at the top of the income distribution provides much of the explanation.

Consider the Federal Reserve. Again and again we hear Federal Reserve officials say that an outbreak of inflation could undermine the Fed’s hard-earned credibility and threaten its independence from Congress. But why is the Fed only worried about inflation? Why aren’t officials at the Fed just as worried about Congress reducing the Fed’s independence because of high and persistent unemployment?

Similar questions can be asked about fiscal policy. Why is most of the discussion in Congress focused on the national debt rather than the unemployed? Is it because the wealthy fear that they will be the ones asked to pay for monetary and fiscal policies that mostly benefit others, and since they have the most political power their interests – keeping inflation low, cutting spending, and lowering tax burdens – dominate policy discussions?

There was, of course, a stimulus program at the beginning of Obama’s presidency, but it was much too small and relied far more on tax cuts than most people realize. The need to shape the package in a way that satisfied the politically powerful, especially the interests that have captured the Republican Party, made it far less effective than it might have been. In the end, it had no chance of fully meeting the challenge posed by such a severe recession, and when it became clear that additional help was needed, those same interests stood in the way of doing more.

Republican policymakers give us all sorts of excuses for blocking further action to help the unemployed. We are told the problem is structural – there is a geographical or talent mismatch between labor availability and labor needs – and nothing can be done to help. But something can be done. We can help workers move to where the jobs are, encourage firms to locate in areas where workers are readily available, and help with job retraining. If mismatches are really the problem, why aren’t Republicans leading the charge on these policies? If they care about the unemployed rather than the tax burden of the wealthy, then why are they allowing community colleges – one of the best ways we have of providing job training for new and displaced workers – to be gutted with budget cuts?

We are also told that the deficit is too large already, but there’s still plenty of room to do more for the unemployed, as long as we have a plan to address the long-run debt problem. But even if the deficit is a problem, why won’t Republicans support one of the many balanced budget approaches to stimulating the economy? Could it be that these policies invariably require higher income households to give something up so that we can help the less fortunate? Tax cuts for the wealthy are always welcome among Republicans no matter how it impacts the debt, but creating job opportunities through, say, investing in infrastructure?

Forget it. Even though the costs of many highly beneficial infrastructure projects are as low as they get, and even though investing in infrastructure now would save us from much larger costs down the road – it’s a budget saver, not a budget buster – Republicans leaders in the House are balking at even modest attempts to provide needed job opportunities for the unemployed.

The imbalance in political power, obstructionism from Republicans designed to improve their election chances, and attempts by Republicans to implement a small government ideology are a large part of the explanation for why the unemployed aren’t getting the help they deserve.

But Democrats aren’t completely off the hook either. Centrist Democrats beholden to big money interests are definitely a problem, and Democrats in general have utterly failed to bring enough attention to the unemployment problem. Would these things happen if workers had more political power?

When we talk about leveling the playing field, it is generally in terms of economic opportunity. However, leveling the political playing field is just as important, and in the past unions provided workers with a powerful voice in the political arena. But unions have largely faded from the scene, leaving workers with very little organized power. Correcting the political imbalance this has created through the renewed political empowerment of the working class must be part of any attempt to improve our response to serious recessions.

It also suggests a solution — renewed political empowerment of the working class — but that’s easier said than done.

By MARK THOMA, The Fiscal Times
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