The return of the currency wars

Talk of “currency wars” became popular in the wake of the 2008 financial crisis. During that period, when demand was extremely weak and central banks desperate to avoid deflation, it seemed that every country with the ability to do so was trying to devalue its money so as to boost exports and steal growth in a “beggar-thy-neighbour” race to the bottom.

We’re now in a very different environment, says Vincent Deluard of financial services group StoneX. While the 2008 financial crisis destroyed demand (everyone had too much debt) while maintaining supply, which was deflationary, the Covid-19 pandemic and ensuing lockdowns destroyed supply (businesses were shut and supply chains halted), while maintaining demand (as governments paid wages).

This has proved inflationary, which demands the opposite approach to that seen after 2008. Given that economies are at full capacity, the only way to boost supply without raising inflation is to import – “strong currencies are needed to lower commodity bills and steal trade partners’ output”, says Deluard. In short, “the winners of the currency wars of the 2020s will be the currencies which can rise the fastest”.

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The six winning currencies

Currency exposure is not the most important factor to worry about when considering where to put your money. However, it might help to guide you as to where to allocate the overseas chunk of your equity portfolio – or give you some ideas as to which currencies to hold in the cash portion of your portfolio. So which are best placed to win? Deluard lands on six: the Australian, Singaporean and Canadian dollars, plus the Swiss franc, the Norwegian krone and the Chilean peso.

Sharp-eyed readers will note that four are commodity currencies: Norway and Canada are oil plays, while Australia and Chile export lots of key metals. Meanwhile both Norway and Switzerland have vast reserves: “Every Norwegian and Swiss owns $243,000 and $128,000, respectively, in foreign assets,” notes Deluard.

Singapore’s dependence on commodity imports is a weak spot but it has a healthy national balance sheet (with net debt of zero and a triple-A credit rating) and a strong track record of controlling inflation. Note also that the Singaporean market as a whole looks relatively inexpensive right now, particularly as Singapore re-opens post-pandemic.

If you’re investing in overseas shares be aware that foreign exchange is one of the few areas where brokers and banks can still get away with charging ridiculously high fees in the form of rip-off exchange rates, so do double-check what you’re being charged on that front.

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