A currency war happens when governments competitively devalue their respective currencies. And ladies, gentlemen, alien robot, and monster, we are currently in the middle of one.
Some of the world’s major economies have been struggling, whether its a battle with rising employment rates, weakening exports, or keeping stagflation’s ugly head from appearing.
Consequently, this has convinced central banks all over the world to implement measures that weaken their currencies, in one way or another, to help encourage foreign investment, making exports more competitive, or to keep the price of goods and services balanced.
I know this isn’t exactly shocking news. The Fed announced QE3 in September 2012, British central bankers have been engaging in asset purchases for a while now, and the SNB announced its peg on EUR/CHF last year.
However, a few more central banks joined in on the fun and have recently pulled off a few tactics too.
This year, it all started when the BOJ unleashed its aggressive monetary easing policy under BOJ Governor Kuroda. A month or so after, the ECB also eased its monetary policy by cutting its benchmark rate by 25 basis points.
It was soon followed by the RBA which slashed rates below 3.00% for the first time in history to 2.75%. Meanwhile, the RBNZ admitted that it’s been secretly selling the Kiwi, marking the central bank’s first intervention since 2007.
So what now?
It doesn’t take Superman’s X-ray vision to see that among the central banks listed, the BOC is the only one that isn’t on the devaluation bandwagon. I couldn’t help but think that maybe it’s time to buy the Loonie.What do you think?
Of course, I don’t want to get ahead of myself and bet the farm on the comdoll. After all, Mark Carney will soon turn over his baton and Steve Poloz will become the next BOC Governor.
For all we know, the new head honcho could turn out to be more dovish than Carney if domestic data starts to turn for the worse.
It’s also worth considering that it may only be a matter of time until the BOC reacts to the ongoing currency war and cuts rates to maintain or boost its export competitiveness too.
Still, I think it’s worth everyone’s while to remember that the BOC is one of the few major central banks that is not doing anything directly nor indirectly to weaken its currency.
Well, at least, not yet.