A big day in the currency wars – here’s what it means for you

published 3 April 2013

Thursday4 April is a big day in the currency wars.

The heads of three of the world's most important central banks are squaring up to see who can wreak most damage on the currencies in their care.

The euro, the yen, and sterling are all at the mercy of the latest monetary policy decisions from Europe, Japan and the UK.

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So who will win? And what does it mean for your money?

It's decision time for the Bank of Japan

On Thursday, we learn the results of the latest central bank meetings in Europe, Britain and Japan. Each of these decisions has the potential to cause a fair few ripples in global markets. Let's take each in turn, then talk about what it means for your money.

First, we've got the Japanese central bank's big meeting. This is probably the most eagerly awaited of the releases.

As you'll probably know by now, Japan has been on something of a roll recently. That's because the new prime minister, Shinzo Abe, has effectively promised to do what it takes to kick the Japanese economy out of its multi-decade slump.

Investors in Japan have been disappointed in the past, but Abe has made some very convincing threats so far: he's installed his own man at the Japanese central bank; he's set a formal inflation target; and he's warned the Bank of Japan that he'll take away its independence if it doesn't get its finger out.

So the markets are expecting great things from new central bank chief Haruhiko Kuroda. They expect him to pump more money into the economy, and to buy longer-term Japanese government debt.

The big risk with high expectations, of course, is that Kuroda disappoints. As David Scutt of Arab Bank tells the FT, "given near-constant chatter about the need for bold policy action to achieve their 2% inflation target, any underwhelming policy response, something they're notorious for, will see the yen strengthen to the detriment of the Nikkei".

The UK it's all about the pound

Next we have the midday announcement from the Bank of England. The thing to watch for here is whether more quantitative easing (QE) is announced or not.

The BoE has plenty of excuses to do more. Yesterday's manufacturing data was disappointing. Meanwhile, lending to companies and consumers is falling too. The threat of a headline-grabbing, if somewhat irrelevant, triple-dip' recession hangs over the economy.

However, following a brief post-Budget bounce, the pound has been on the slide again. And this is after Sir Mervyn King's fit of the jitters a few weeks ago, when he said that he thought that sterling had fallen far enough.

I suspect that in the longer run, King would be more than happy to see the pound slide further. But there's a question of pacing. A long, slow devaluation with gradually rising inflation is manageable, and won't scare the horses. A run on the pound is not, and risks spreading into the gilts market.

More QE from the BoE would almost certainly hammer the pound. That may not be a risk that policymakers want to take right now.

How to weaken the euro without annoying the Germans

European Central Bank governor Mario Draghi has a tougher job than King or Kuroda. His counterparts might be dealing with struggling economies but at least they don't have to worry about their currencies being torn apart.

So never mind inflation or growth - Draghi's key goal is simply to hold the euro together. What's the best way to do that?

The countries that are struggling, such as Italy, Spain and Greece, all need a weaker currency. The big risk for Draghi is that one of them will choose to get it by ditching the euro and going back to their former currency. So his best hope of achieving his prime directive lies with having a weaker euro.

He is unlikely to do anything as radical as actually cutting interest rates. That would irritate the Germans, and he's got to keep them on side. There's also a dangerin allowing the euro to weaken too fast. You don't want to give the impression that people are scared it might disintegrate after all.

So I'd expect him to talk the euro down at the press conference following the decision.

What does all this mean for your money?

The truth is, unless you like spread betting currencies, not a lot. (If you do like spread betting, sign up for our MoneyWeek Trader email it's free and packed with good advice on risk management).

These decisions will move the market in the short term. But in the long run, we'd be sticking to our current strategy buy cheap stuff, and diversify out of sterling.

We like Japanese stocks, because they're cheap (even now). If the Bank of Japan head disappoints tomorrow which is possible they'll probably fall back, perhaps quite sharply. But that would be a buying opportunity.

Abe has staked his reputation on doing something to reignite the Japanese economy. He may find this harder than he expects. But he's not going to give up at the first hurdle. If the market panics after tomorrow's decision, you can expect more radical action in the future. The Japanese bull market isn't over yet.

As for the euro: again, we like European stocks because they are cheap. But on top of that, just as with Japan, a weaker euro is also likely to be good for European stocks. And there's no question that the best thing Draghi can do to help the eurozone is to weaken the euro.

And what about the pound? The Bank of England might refrain from giving it a hammering this week. But in the longer run, sterling still has very little going for it. The US dollar looks a far better bet my colleague Phil Oakley wrote about one interesting way to get exposure to the dollar last week.

This article is taken from the free investment email Money Morning. Sign up to Money Morning here .

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John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.