The Currency Wars and Australia: A Double-Edged Sword
While the expression “quantitative easing” has become synonymous with the monetary policy of the United States, since 2010 the central banks of the world’s richest nations have all undertaken efforts to devalue their own respective currencies. While quantitative easing is primarily aimed at spurring economic growth generally, a devalued currency gives a given country’s exporters a strong advantage relative to their overseas competitors -- which is a rather nice bonus.
For example, the United States hopes that a weaker dollar will result in many more Boeing aeroplanes being sold worldwide. In fact, one of the reasons that China and Germany have enjoyed such tremendous success as net exporters is the relative weakness of their currencies. Every BMW sold essentially enjoys a built in discount, a price advantage that consumers around the globe have found irresistible in recent years.*
Unfortunately, as The Economist noted last month, currencies are necessarily valued relative to one another -- and when one currency is pushed down, others must invariably rise. As one might suspect, something akin to a race for the cheapest currency has evolved over the last three years. In 2010, the Brazilian finance minister Guido Mantega described this escalation as “currency wars,” and many analysts and monetary policy wonks see no end to the process in the near future.
In recent weeks, Japan has joined the currency war, with the yen beginning a ferocious slide into weakness – a trend which has certainly caught the attention of European policymakers. Next door in Taiwan, the dollar hit its lowest level since 2010 on 1 February.
Ultimately, all of this sound and fury abroad will trickle down to Australian businesses with a focus on overseas markets – with mixed results. On one hand, Australian exports to Asia will continue to suffer from a strong Aussie dollar and devalued Asian currencies. Australian exports to Japan (for example) will become even more expensive for Japanese consumers than they are at present, and Australia’s second largest export market will be hit hard. This will be especially damaging for the already distressed auto manufacturing industry, which will lose more ground to cheaper Asian auto exports.
On the other hand, competitive currency devaluations across Asia will dramatically increase the profit margins for Australian companies looking to invest in the region. The likely outcome is that Australian investors will become increasingly bullish; taking advantage of comparatively undervalued Asian assets. As the Australia Asia Business Review pointed out recently, an Asian currency war could well be the nudge that many Australian companies need to expand their operations into Asia – a logical step for those firms that are struggling to thrive in the domestic market and feeling the negative impact of the strong Aussie dollar on export earnings.
Aussie firms are used to a certain amount of exchange rate volatility, but the smart money suggests that global currency exchange rates will continue to warrant close attention -- in both developed and emerging markets.
*Yes, the Euro has enjoyed relative strength to other currencies on the market, but by virtue of its participation in the Eurozone centralized monetary union, German goods are effectively priced much cheaper than they would be were valued in German deutschmark. The unavoidable consequence of this is that less competitive economies in the Euro zone such as Greece and Portugal suffer from having their exports made more pricy. Thus, a summer holiday on the Costa de Lisboa costs more when paid in Euros than it would in Portuguese escudos.