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Last month in a Money and Markets column, I pointed out that the euro/U.S. dollar exchange rate would be the next battleground in the global currency war.
Since early February, the euro currency has declined nearly 5 percent against the greenback, which may sound insignificant, but in the world of Forex it qualifies as a sizeable move.
What’s more, the euro looks poised to slide even lower against the buck, driven by several key economic and monetary factors that are behind this exchange rate move.
First, euro-zone growth prospects have gone from bad to worse relative to the U.S. The European Commission just revised down its outlook for the 17-nation euro zone, admitting GDP will contract 0.3 percent in 2013, while unemployment climbs to 12.2 percent.
That’s not to say U.S. growth prospects are much better. But our economy is at least moving in the right direction relative to Europe, and that’s all that matters.
Second, thanks to the recent backup in Treasury bond yields, global investors can now earn higher interest rates in the U.S. relative to safe-haven bonds in Europe. The benchmark 10-Year U.S. Treasury yields 2.02 percent, compared to 1.48 percent on comparable German bonds.
Once again, it’s the trend of growth prospects and interest rates in the U.S. relative to Europe that matters most.
Global central banks are fully engaged in a fight to devalue their currencies as shown by the growth in their balance sheets. Investors are likely to see plenty of action on the euro-currency front in the months ahead. But let’s not lose sight of the other front in this global currency war … the Pacific and Japan!
Japan’s Offensive a “Victory”
After all, Japan’s offensive against the yen is making the biggest waves in global Forex markets. And Japan’s policies are likely to spark retaliation from its Asian neighbors.
Recall that Japan’s economy has been stagnant and mired in deflation for the past 15 years. Quantitative easing was practically invented by the Bank of Japan (BOJ) in a desperate bid to escape its economic death-spiral. But Japan’s new government is taking money-printing to a whole new level.
In January, Tokyo signed off on a 10.3 trillion yen stimulus package — equivalent to 2.6 percent of GDP. The BOJ is adopting a 2 percent inflation target and committing its foreign exchange reserves — the world’s second-largest — to buy government bonds and perhaps stocks.
Total government “stimulus” spending now amounts to more than 75 trillion yen since 1999, and adds to an already staggering debt level of 220 percent of Japan’s GDP.
In other words, Ben Bernanke’s Fed has got nothing on Japan … the BOJ is engaged in another league of high-stakes money printing … and Japan’s offensive has so far been a spectacular “victory.”
* Japan’s currency sank 19 percent against the dollar in just the past three months …
* And the yen has plunged over 20 percent against the euro …
* Meanwhile, Japan’s export-dependent stock market has soared 25 percent over the same period.
This is the measure of success in the zero-sum currency war game. However, Japan’s Asian neighbors, particularly China, are no doubt already plotting a counter-attack.
Will Asia Strike Back?
Asia’s other export-dependent economies: China, Taiwan, South Korea, etc., are already feeling the pinch from a cheaper yen. The most telling sign is stock market weakness.
While stocks in the U.S. and Japan are soaring this year, thanks to easy money engineered by the Fed and BOJ, China’s Shanghai Composite is up just 1.02 percent. Stocks in Taiwan have gained only 1.6 percent, while South Korea is down 3.07 percent in 2013!
Clearly investors are worried the cheaper yen will cut into exports because companies in China, Taiwan, and South Korea are now placed at a competitive disadvantage.
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| The BOJ has taken the high-stakes money printing game to a new level. |
And it’s only a matter of time before they strike back, retaliating in kind.
“Currency wars in Asia may be the world’s most intense,” the American Enterprise Institute warned recently. That’s because there is so much at stake economically as each economy fights for its shrinking share of trade in the midst of weak global demand.
As the currency wars escalate in Asia, keep an eye out for the likely winners and losers …
First, the LOSER: Japanese Yen!
Japan is “winning” the currency war by torpedoing the yen’s value. The early victory will only embolden the BOJ to pull out all the stops and further devalue the yen.
Japan’s Prime Minister put it best when he said his latest policies are: “on a different scale from previous measures.” I take him at his word.
Granted, the yen has already made a big move, and you may think you’ve missed the trade. But I expect more yen weakness perhaps after a short-term bounce.
I wouldn’t be surprised to see the USD/JPY exchange rate well above 100 soon, and perhaps above 115, from 96 currently. There are numerous ways to potentially profit including yen futures, options, and targeting the USD/JPY pair in a Forex account.
Also, an ETF to consider is the ProShares UltraShort Yen (YCS).
Second, the WINNERS: Asian Stocks!
The spectacular gain in Japanese stocks this year shows the measure of success in currency wars: Export dependent stock markets, such as in South Korea and Taiwan, get a big boost from a cheaper currency. The Bank of Korea is already discussing potential interest rate cuts to strike back.
Although both markets have been under pressure lately, any retaliation in kind by South Korea and Taiwan to weaken their currencies and regain competitiveness with the yen would almost certainly boost their stock markets.
ETFs to consider include the iShares MSCI South Korea Capped Index (EWY) and the iShares MSCI Taiwan Index (EWT).
Bottom line: Currency wars are heating up across the Atlantic and Pacific. After Japan’s “victory” with the yen I’m closely watching for even more profit opportunities from any potential escalation in Asia. Global currency wars can make for volatile markets, but can also lead to Forex gains, and trigger major moves in global stocks as well.
Good investing,
Mike Burnick
Mike Burnick, with 30 years of professional investment experience, is the Executive Director for The Edelson Institute, where he is the editor of Real Wealth Report, Gold Mining Millionaire, and E-Wave Trader. Mike has been a Registered Investment Adviser and portfolio manager responsible for the day-to-day operations of a mutual fund. He also served as Director of Research for Weiss Capital Management, where he assisted with trading and asset-allocation responsibilities for a $5 million ETF portfolio.
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Pretty hard to compare growth rates,of countries,without knowing the actual inflation rates.It’s easy for central banks to devalue currencies and show nominal growth.If govts used honest inflation numbers,there wouldn’t be any growth.In fact,everything govt does,involves costs(inefficiency,waste,fraud,politically motivated spending,etc.) and the result is always negative.I believe most govts give back 50%,or less, of what they take out of their economies.
How will the yen devaluation affect the Chinesse Yuan/Renminbi?