Are We Seeing A Return To “Beggar Thy Neighbor” And Currency Wars?
2022.10.03 06:38
Much has been made in recent months about central bank policy harmonization. Particularly since inflationary pressures have increased in the wake of the pandemic, one central bank after another has embarked on its own tightening cycle. Japan has been a notable holdout to this trend, and we recently witnessed a clear demonstration of this policy divergence between the US and Japan.
Fed Hikes, BoJ Stays Put
On Sept. 22, just as markets were digesting the Federal Reserve’s by 0.75% for the third meeting in a row, the Bank of Japan announced that it would be maintaining its own short-term interest rate at -0.1%, where it has been locked since 2016.
The speeches that followed both interest rate announcements couldn’t have been more antithetical in tone or content. On the one hand, Powell sounded hawkish as ever, even providing his own rendition of Mario Draghi’s famous “whatever it takes” statement. Meanwhile, Haruhiko Kuroda told reporters that the BOJ could maintain its ultra-loose monetary policy for years.
BoJ Intervenes In Currency Markets
In the following hours, the BOJ intervened to support the for the first time since the late 1990s, preventing it from breaking meaningfully above the 144 handles against the dollar and sending the pair back down to the 140 level for the first time since the beginning of September.
The intervention was not endorsed or aided by any other central banks. There is an unwritten agreement against G7 nations intervening to strengthen or weaken their currencies. In a bygone age, the action might even have been called a “beggar thy neighbor” policy.
Criticism of this action has been notably absent, where in the past, the United States may have had a few choice words for the BoJ governor. Many comments on this intervention in the financial press have essentially dismissed it as a temporary respite for a currency that’s doomed to continue plunging as long as Kuroda sticks to his dovish guns.
Criticism Continues For Chancellor Kwarteng
Interestingly, a public official on the receiving end of a great deal of international criticism of late has been the new British Chancellor of the Exchequer, Kwasi Kwarteng. His “mini-budget,” replete with fiscal stimulus and tax cuts geared at growing the UK’s way out of an impending recession, has been met with the kind of condemnation one would expect to be reserved for more blatant acts of currency manipulation.
And while the sterling’s present woes are being squarely blamed on the conservatives in the UK media, as the chart above demonstrates, the cable’s performance may have a little more to do with dollar strength than pure GBP weakness.
This begs the question, is fiscal the new monetary? And could the United Kingdom be getting ahead of the pack by combining the BoE raising rates, and the Treasury cutting taxes and turning on the fiscal taps?
Furthermore, why is the criticism coming in so strongly for the UK but not Japan? Could it be that the UK’s monetary and fiscal stance now seems specifically geared at strengthening the sterling against its competitors when Japan can only weather the storm and hope for a broader pivot back to dovishness for its own policies to start making sense again?
US CEOs Testify In Washington
The same week Powell and Kuroda were plowing ahead with their divergent policies, CEOs from the largest US banks, including JPMorgan Chase (NYSE:), Bank of America (NYSE:), and Citigroup (NYSE:), testified before the Senate committee.
Ordinarily, the testimony would be a non-event for traders. Still, there was an interesting aside when the always-entertaining Senator Kennedy from Louisiana began his questions to the gathered bank CEOs.
“I don’t like to brag about the expensive places I’ve been. The night before last, I went to the grocery store,”
To which Citibank CEO, Jane Fraser, burst into laughter and nodded approvingly.
“Inflation is gutting the American people like a fish. Now we know what our Federal Reserve is doing on the monetary side, I want to ask you what you think we should do… on the fiscal side.”
JPMorgan Chase CEO, Jamie Dimon, said,
“I think a little less fiscal spending would be good because 30% of US GDP was spent over a two-year period, which is literally unprecedented. But I also think on the supply side, taxation, immigration, regulation, healthcare, infrastructure, this permitting bill, if you did some of those things, you would help grow the economy to reduce inflation.”
Senator Kennedy then asked,
“Would a tax cut be out of the question for you?”
“I say calibrate taxes so that you create more growth,” replied Dimon.
“How about getting the government off the backs of the American people in terms of regulation?” Senator Kennedy pressed.
“That would be helpful, I think, particularly for small business, I don’t want to sit here and complain about big companies.”
Other than suggesting the US slows the pace of fiscal stimulus (which, lest we forget, the US did a great deal more of during the pandemic than Britain), Jamie Dimon’s suggestions don’t seem to be too far off from what the UK seems to be attempting to do now.
This notion of spurring growth to avoid a recession during inflationary times is being widely ridiculed in the press when it comes to Chancellor Kwarteng’s mini-budget.
So, with all the above in mind, look at the chart below. If buying the dollar wasn’t an option, which of the above three currencies seems like it might be the best bet at the moment?
EUR, GBP and JPY vs. USD.
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