Currency Outlook for 4Q 2010

October 10, 2010 by timbercommunity

Is it a currency war? There is great concern that a currency war will erupt between the U.S. and China, which marked Friday's opening of the International Monetary Fund (IMF) and the World Bank's annual autumn meeting in Washington. What's passing off right now is that every nation wants to export their way out of the recession. There are voices from many different countries that the Chinese yuan, which is not freely switchable and pegged to a basket of currencies, is too weak.

International Monetary Fund, admonished that the world's countries risk a currency war if they try to resolve domestic problems through exchange rates. Many emerging economies rather blame ultra-low interest rates in the US and other rich countries for hot-money streams into their markets.

Central banks in the United States of America, Eurozone and Japan are likely to maintain interest rates on hold for the foreseeable hereafter. The USD is going down against most major currencies, not just the Euro. The Euro suffers from deep structural issues.

China and India will lead the Asias growth. For China and India, IMF expect growth this year at about 10,5 and a little above 9,1 %, respectively.  China is likely to be a central focus for currency investors in the second half of this year. After all, the Chinese economy accounted for 44 % of global growth in 2009 as developed economies contracted. (source : fxstreet). According to the U.S., China is in an artificially low yuan's exchange rate against the dollar.

This gives an unfair advantage to Chinese manufactured goods. Many economists claim that China is maintaining an artifically weak currency and there are voices to place punitive tariffs on China in both the US and Europe. The European Central Bank President Jean-Claude Trichet has recently exhorted China to increase the economic value of the yuan but China has opposed a revaluation of its currency. China has basically locked its currency against the dollar over the past two years to protect its export industry from the recession. 

China's GDP is only one third of the United States, and China's consumption is only about one-fifth of the United States. IMF predicts that there will be a rebalancing, and China's current account surplus with the United States will fall over time.

China get support from BRIC countries
U.S. and IMF have also met strong opposition by several other of the "new" major economic players in the world. The so-called BRIC countries (Brazil, Russia, India and China) are opposed to U.S. attempts to weaken the currency controls in other countries. Russian Deputy Finance Minister Dmitry Pankin said the BRIC countries in connection with the ongoing IMF meeting in a "powerful" ways will oppose attempts to condemn foreign exchange controls. Pankin said that the BRIC countries have agreed on a position on the exchange rate in itself. The problem is rather a consequence of a deeper process, such as investment climate.
For the forestry industry it is quite interesting since this is a quite old standpoint from Russia. The Russian government wants to attract US $51.2B of investment into the country’s forests by 2020 and have been criticized for its rising export tariffs in wood. EU responded by linking Russian WTO membership with the wood tariff issue.

Brazil's minister of finance Guido Mantega, has labled the current international struggle over currency valuation much more than simple political posturing and he is calling the state of affairs an international currency war. Brazil has doubles tax on foreign investors buying local bonds and fixed return assets to curb a currency rally that could turned into an issue in the country's presidential race. Brazilian interest rates among the world's highest at 10.75%, foreign investors are pouring cash into the country in search of steep returns. Goldman Sachs has since November 2009 called Brazil´s currency Real the most overvalued currency and Mantega’s war of words, aimed at cooling off the rising real.  But is the Brazilian Real really overvaluated? Brazil with a population of approximately 190 million is one of the fastest growing emerging economies in the World. The economy grew at an annualised rate of 8.9 per cent in the first half of 2010. However Moody's currently classifies Brazil's sovereign debt as investment grade, with a Baa3 rating which is the same rating as Iceland and defined as a moderate credit risk.

Purchasing power parities (PPPs) are the rates of currency conversion that eliminate the differences in price levels between countries. Read table from OECD here . A currency that have been called the most overvalued currency in the world (OECD) is the Swiss Franc. The Swiss franc could however be a big winner during the last half of this year, as endeavours by the Swiss National Bank to weaken the currency appear to have reached out a conclusion.

One of the most interesting major currency right now is the USD and Japan Yen. This is not for technical causes, but rather due to the possibility of intervention by the Ministry of Finance Bank of Japan during the second half of the year. (source : TradeStation). Other likely nonachievers are the main Central Eastern European currencies. With the possible exception of Poland, these are the small, open economies most exposed to any deterioration in the Eurozone economy as a result of its peripheral debt and fiscal problems.
According to the U.S. investment bank Goldman Sachs the dollar will continue to fall . In a year the Swedish crown will be at 5.68 SEK and already the spring slipping U.S. currency during the six-crown mark. In three months the dollar is expected to cost 6.43 SEK, 5.87 SEK in six months and in a year 5.68 SEK. The prognosis say more about the weakness of the dollar.