produced a handy guide for those that believe the current
currency fracas this year will morph into what it calls
something more internationally combustible
in other words a
global currency war.
As the bank
notes, more countries are intervening, more are fiddling around
with currency pegs and many are hiding behind a macro
prudential flag of convenience to lend legitimacy to
cannot, of course, be multiple winners of this game, says
David Petitcolin, global currency strategist at RBS.
countries can put their money where their mouths are, and which
countries rhetoric against currency strength can be
followed up with action?
the potential players and winners in any
global currency war, RBS created composite scores to
measure countries relative intention to weaken their
currency and their capacity to do so. The bank calls them the
relative intervention intentions (RII) and the relative
intervention capacity (RIC) scores.
governed by the openness of a countrys economy, export
growth and real effective exchange rate (REER) valuation. Of
course, intentions rise with increasing weight of exports in an
economy and a less competitive REER.
the scope a country has to weaken its currency without damaging
its economy. That is constrained by the deviation of a
countrys inflation rate from its target and the size of
its external debt.
are set out in the chart below, with countries most likely to
strength in their currency those which combine with the
highest intention to intervene with the highest capacity.
It turns out
that Indonesia, Thailand, Malaysia, Chile and surprisingly
Sweden which has no recent history of intervening in SEK
are the most willing and able to intervene. At the other
end stands the UK and New Zealand, which are among the least
willing and able to step into the currency market, according to
countries such as Hungary might rail against currency strength,
but inflation and debt constraints mean they are unlikely to be
able to keep up a sustained campaign to weaken their
currencies. In contrast, MXN bulls can take heart:
Mexico has the wherewithal to sustain an intervention
campaign, but it lacks the motivation.
Interestingly, while Chinas capacity to intervene might
be high its external debt burden is minimal and
inflation moderate its willingness to intervene is
tempered by resilient export growth and the relatively small
weight of exports in GDP.
analysis suggests a weak JPY is not the cure-all that will turn
the Japanese economy around.
all the print unlimited yen hype in Tokyo, Japans quest
for growth and inflation cannot really be led by intervention
to weaken the yen per se, as exports are a small share of the
A weaker yen can be a
highly acceptable consequence of other policy action by the
Japanese, but its not a compelling lead objective in
itself, he says.
Best draw up
those battle plans.