Currency As the New WMD

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Currency As the New WMD
Justin Burkhardt | FXFocus.com

How do you hedge when shots are pips? The next world war will be computerized. The global economy is on the brink and battle lines are forming with one objective, restoring economic balance. Properly engineered devaluation measures would accomplish precisely that. This is a new age of currency wars. In the past countries would directly manipulate the value of their currency with trade wars and the like. But today’s currency war is a result of unconventional monetary policy by central banks, which indirectly impacts the value of a countries currency.
 
The G7 has been working hard to defuse investor concerns of a currency war, but recent comments have only stirred up confusion in the markets prompting an unintended response. On Tuesday the groups said  “fiscal and monetary policies must not be aimed at devaluating currencies” a statement that had been directed at Tokyo.
 
Shinzo Abe, Japan’s new prime minister, is being accused of manipulating the value of the Yen to gain an unfair competitive advantage in international markets. Shinzo has been working tirelessly to convey that his policies were not aimed at devaluing the country’s currency, but that they were targeted at deflation… and the devaluation of their currency was just an implication of that objective…. Really?
 
Japan may be in the spotlight today, but the truth is they are not the only country participating in this fight to the finish. Europe’s strides appear to be more subtle, but recent policies would indicated that they have a similar objective in mind… That thinking can be backed up by recent comments from Mario Draghi, head of the European Central Bank (ECB), who has stated on several occasions that the value of the Euro is too high and that a continuation of trend will negatively impact overall growth. And couldn’t we say the same thing about the United States with the Feds new “QE infinity” world? The list goes on…
 
The G20 is meeting in Moscow this week, so the question remains, how will they respond and what can they actually do when it’s the central banks that are indirectly impacting currency values?
 
Everyone is trying to devalue their currency, so we have to understand how to navigate through this tension because it will inevitably spark increased volatility in the markets.  Understanding how that volatility is going to play out is our job as currency traders...
 
Can your portfolio withstand what’s on the horizon, or are you still looking for the perfect hedge?

 

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Justin Burkhardt