Such has been the hype surrounding the issue of global currency conflict that it has become one of the most written about topics in the world’s media.
As JPMorgan observes, the issue has gone viral, with the expression appearing in more daily news stories than global warming, horsemeat, EMU break-up and K-pop sensation Gangnam Style.
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But for all the hype in the media surrounding currency war, there are few predicting that it will soon descend into the modern day version of competitive devaluations of the 1930s, or the trade wars of the early 1990s when the US used commercial policy to influence its trade imbalance with Japan.
Certainly, policymakers from developed economies are still a long way from that point, while EM policymakers, traditionally the protagonists in recent currency skirmishes, are far away from entering the conflict en masse.
Indeed, instead of a wholesale fight against currency strength provoked by ultra-easy monetary policy in the developed world, the major theme among EM FX since the start of the year has been that of differentiation.
As the major tail-risks to the global economy and financial system – a eurozone break-up, hard landing in China and a recession in the US – have diminished, so the correlation among EM currencies has decreased.
Correlation among EM FX has in fact dropped to zero, a level not seen for a decade, as local themes take precedence over global issues.
| Correlation of EM FX drops to decade low of zero |
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| Source: JPMorgan |
Bert Gochet, strategist at JPMorgan, says as consequence there is little risk of a currency war among large EM countries.
“Despite the noise level around a global currency war reaching fever pitch, we do not expect EM policymakers to join this fight,” he says.
To start with, notes Gochet, some countries would rather see a stronger currency than a weaker one at the moment.
Brazil, for example, wants a stronger real to battle inflation; Indonesia has been spending reserves to prevent weakness in the rupiah; India is reeling from a widening current account deficit, while South Africa has been suffering from a re-rating.
In fact, only three large EM central banks are leaning against currency strength at the moment.
Korea is intervening, but no more than usual, Mexico is set to cut rates, but not intervene directly, while Turkey has lowered its interest rate corridor.
“In sum, we do not see this so-called currency war going EM-wide among major markets,” says Gochet.
It would seem historically high levels of differentiation, not all-out war, is the defining characteristic of EM FX at the moment.