Exports to become focus as currency wars escalate
The trade in goods and services only comprises a fraction of daily currency turnover, which is why the foreign exchange markets have tended to ignore trade data for advanced countries with floating exchange rates. But that is changing as exports are seen as a top priority by a growing number of countries desperate to remain internationally competitive.
In that spirit, Brazilian finance minister Guido Mantega accused the US of protectionism and of risking a global currency war by weakening the US dollar via quantitative easing. But this war has been going on since the financial crisis and if anything is set to escalate as countries look to exports to support their domestic economies.
But currency wars are something traders need to be weary of – as they can generate big losses on otherwise perfectly rational trades. They create choppy price action and are designed to end trends often in defiance of economic fundamentals. And it is notable that almost no country wants a strong currency these days. Not the US, including many Eurozone countries, not even traditional safe haven countries with strong economies such as Switzerland and Sweden. Japan has been struggling for years to weaken the yen, Australia is now worried about the strength of its currency, while the UK has since the financial crisis preferred a weak pound.
Therefore traders must pay close attention to the utterances of central bank officials and need to become aware of their pain thresholds with regards exchange rates. Often those pain levels are measured by the performance of export and import volumes and traders should pay attention to trade figures. And though central banks often can't buck the market forever, they can certainly inflict losses on those trading against them. A lack of global economic growth is likely to see central banks become more aggressive in either trying to stimulate GDP as in the US or defend exports as with Japan.
The real winner from the currency wars is likely to be gold. Many investors worried about inflation are likely to seek sanctuary in what is quite possible the last real 'hard currency' left.