Guest Post: Welcome To The Currency Wars

Tyler Durden's picture

Submitted by Brian Rogers of Fator Securities

Welcome To The Currency Wars

“Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.”  --Milton Friedman, The Counter-Revolution in Monetary Theory (1970)

Welcome to the Currency Wars

After a long and unintentionally extended (thank you Hurricane Irene) vacation in South Carolina, I am back on the desk.  I was asked yesterday to comment internally on the recent decisions by both the Swiss National Bank and the Brazilian Central Bank.  Both actions, in my view, have potentially exposed everyone in their respective societies to the specter of higher inflation while the benefits of these rate cuts/currency pegs primarily accrue to their export sectors.  Is this a big risk?  You bet it is.  These central bankers are crossing their fingers and praying that inflation remains tame as the US and Europe slow down and likely enter another recession.  However, what if inflation doesn’t cooperate?  What if inflation remains persistently high, even as over 50% of the global economy enters a recession?  How will the new consuming patterns of the approximately 2.7bn people living in China and India change historical pricing correlations?  If the price action of Brent crude is any indicator, these central bankers should be afraid.  Very afraid.

First off, the Swiss peg.  In my opinion, it’s a sign of a very desperate central bank that is closing its’ eyes, crossing its’ fingers and betting everything on red.  My bet is that they will lose control of the peg soon, likely before the end of the year.  This undermines the entire notion of the Swiss franc as a ‘safe haven’ currency and will make gold and silver all that more valuable during the next crisis phase.  The Swiss have now made their currency nothing more than a leg in a carry trade.  By fixing a peg level, the central bank has placed a huge target on their backs and told fixed income investors to arb away!  You can now borrow short-term in CHF, lend long-term in a riskier currency and know that the CHF leg of your trade is safe at 1.20.

Remember the Japanese intervention back in March as the JPY rallied after the earthquake?  The government got involved in the FX markets at 79 and promptly caused a sell off that went all the way to 85.5.  However, with enough time the market simply overwhelms the efforts of even the most ardent money printers.  The USD/JPY is now 77.42, or approximately 2% stronger from the original point of intervention.

In Brazil, the BCB cut their short-term SELIC rate from 12.5% to 12% using the excuse that this move was needed as growth is slowing.  For sure there is some truth to the idea that growth in Brazil is and will continue to slow.  The recent GDP numbers came in slightly below expectations of 3.2% at 3.1%, however, this is down from an annualized number of 9.27% just going back March 2010.  So the trend is clearly downward and much of this attenuation is due to the much stronger BRL which at 1.65 is fully 34% stronger than it was in December 2008 at 2.51.  Also moving up slightly is the unemployment rate which has moved up to 6% after recently bottoming at 5.3%.  However, offsetting this data which points to economic weakness has been some rather uncooperative inflation data.  The BCB’s target inflation rate is 4.5% with the upper band at 6.5%.  The problem is that all of the recent data have been coming in above the central band.  Just recently the IPCA Inflation number on a YoY basis recently came in hotter than expected at 7.23%, over 73bps higher than the upper end of the band.  And yet in the face of such data, they cut rates 50bps.  It’s important to understand that the Brazilians and the BCB have their own nasty history with inflation in the 80s.  They have spent the last few decades diligently working to build a reputation as a hawkish, inflation fighting institution.  Despite this, just like the Swiss, they have in one surprise announcement thrown inflation fighting out the window in favor of a weaker currency. 

Let’s look at Brent crude briefly.  Despite the recent spate of bad economic data and warnings of impending recessions, Brent continues to trade firmly above $100bbl, currently sitting at $115.34.  Anyone focused on WTI is missing the mark, Brent is the global oil standard, even here in the US and it is only down 9% from its April high of $126.74/bbl.  It is fully 239% above its’ 2008 low of $34.04/bbl.  If we do go into recession, it does not appear like a weak oil price will be there to help us as before.  And with central banks globally poised to print to infinity to promote weaker currencies, you can bet that the price of oil, grains, metals, fertilizers and other inputs will remain high.  Could the Arab Spring morph into a Western Winter?

The central banks of the US, Europe, Switzerland, Japan, Brazil and China (via their peg to the USD) are all actively suppressing or cutting their interest rates, buying their own sovereign debt or actively intervening in their currency markets.  These are all very different activities with different costs and benefits but the one thing that they all accomplish is an increase in fiat currencies.  As one bank prints or otherwise weakens their own currency, by definition they strengthen someone else’s.  This causes the exporters in the stronger currency to lose earnings and growth.  Which causes them to try to weaken their currency and by definition, strengthen someone else’s.  In the current economic environment where the US is the dumping ground for the rest of the world’s excess supply, this only works so long as we are increasing our own debt levels.  But our debt threshold as a people, economy and government has been reached, breached actually.  Which means we are now forced to devalue our own currency to maintain our mountain of debt, by definition strengthening the rest of the world’s currencies.  Unfortunately, this means we’re trying to increase our own exports at exactly the same time every country is trying to do the same thing.  So we devalue to make our exports cheaper.  And then they devalue to make their exports cheaper.  And then we devalue again.  And then they devalue.  Rinse, wash, repeat.  

In my opinion, the Swiss and Brazilian moves signaled the true beginning of the global currency wars.  The depreciation race to the bottom has begun.  Trade wars will be next.  This is just getting started.  Once FX interventions fail, governments suffering from falling exports will attempt to protect local champions via protective taxes, tariffs and the limiting of certain imports.  Affected governments and industries will retaliate for their own loss of exports and so on and so forth.  Welcome to the currency wars.

Wither the Euro

Which brings us to Europe and the highly imperfect Euro.  The only solution for Europe is a consolidation of fiscal authority at the national level, something like a United States of Europe.  This will allow for the issuance of a Eurobond and allow the proverbial debt can to be kicked down the road a bit further.  However, even this imperfect solution will never fly.  There were times in the mid-2000s where the powers that be in Europe tried to pass a unifying constitution and they were soundly rejected.  And this was when the economy was strong, jobs plentiful and the cost of integration viewed to be relatively light.  In the current economic situation, however, integration seems unthinkable.  All of the recent local and regional elections in Germany, Finland and elsewhere seem to verify this viewpoint as voters continue to elect politicians who will not support more bailouts or further losses of national sovereignty.  Europeans are voting for less integration rather than more so this is a non-starter in my opinion.  Which means more EUR weakness and eventually an unwind of the currency union.  As investors exit the EUR, some will buy CHF and test the SNB.  They lost billions earlier in the year on market interventions.  They will lose billions more on this one until they eventually capitulate. 

The currency union will fail not because the current political leadership wants it to, quite the opposite, it will fail because the people of Germany are Germans and don’t want to be equal members of a broader European concept called United Europe.  Same thing for the Dutch, French, Belgians and others.  This will ultimately kill the hope some hold out for the Eurobond concept.  No fiscal union.

Print More Euros?  Nein!

So the other option is massive printing, aka the preferred option of one Ben S. Bernanke.  In my opinion, the ECB is really a proxy for the Bundesbank.  The Germans, having a particular history with money printing to solve debt problems, will be loath to support much more printing and the polls in Germany so little support for this “solution.”  Trichet will continue to print as the banking crisis worsens but at some point he will simply have to pull the plug and allow the chips to fall where they may.  The Germans will not repeat the mistakes of the Weimar Republic, even if it means the breakup of the decade or so experiment called the Euro.

This means a banking crisis is coming.  The major European are all under-reporting their exposure to the PIIGS because they are reporting net, not total exposure.  They have hedged some of their PIIGS risk in the CDS market but in a modern-day banking crisis, the value of those hedges will approach zero as counterparty risk will surge once one of the main banks begins its death spiral.  Redemptions will hit the hedge funds, forcing them to liquidate and further rendering the value of any protection they wrote worthless.  A hedge only has value if your counterparty is financially able to deliver on the contract.  With Greek paper implying at least a 40% haircut, the big banks in Europe are toast.  And that’s only discussing Greece.  If Italy comes under further pressure, forget it, game over.  Italy is way Too Big To Bailout. 

Could the US Fed end up purchasing European sovereign debt in an attempt to prevent a collapse of the Euro?  Although it doesn’t seem too likely today, I wouldn’t bet against it completely.  If buying more PIIGS debt helps keep the banks alive another day, then buy they will.  Don’t be too surprised if it happens.  As the Swiss and Brazilians just showed, all options are on the table.

This will affect the US banks as well, particularly the large derivative players.  Counterparty risk will surge, funding will dry up and capital levels will be questioned in detail.  And this particular leg of weakness doesn’t even consider the capital that may need to be raised from the FHFA lawsuits announced last week.

This will force the US government to enact the bank nationalizing powers of the Dodd-Frank Act to ring fence the good assets (assuming there are some) of the major US banks that come under fire.  In turn, this will put significant pressure on the US government as the FDIC is forced to make good on billions of dollars of deposits.  In addition to the billions being lost on the GSEs, the government will be forced to spend billions on the banking sector while teachers lose their jobs to austerity.  This will further roil US politics as both major parties will want to bailout the banking sector but neither will want to move first!  You think we had gridlock over the debt ceiling debate, you ain’t seen nothin’ yet!

The 30-yr Bond Bull Says Goodnight

The end result will be an eventual eroding of faith in the US government’s credit.  The market will eventually wake up and realize that monetization is the one and only way our government can kick the can down the road without immediately collapsing the economy.  Which means fixed income investors will lose ad infinitum.  Imagine a pension fund or insurance company with a 5-8% real return hurdle rate.  How can they possibly stay in 10yr Tsys with a negative real yield?  They can’t.  The vigilantes will eventually stir and move into other asset classes en masse.  This shift out of public assets and in to private assets will represent a change in preferences that has lasted since 1980, over 31 years.  The death of the long-term bull market in govt debt will mean the nail in the coffin for the USD and the US’s role as sole superpower.  It will also mean incredibly interesting things for the ultimate reserve currency, gold.

Bottom line:  now is a great time to get out of govt paper and many miles away from the large US and European banks.  I am a broken record on this but you should own gold and silver miners, fertilizer companies, oil companies and water companies.  Some technology stocks could make sense and reasonable exposure to Asia and Latam.  Corporate bonds of companies providing any of the products listed above (gold/silver, fertilizers, oil and water) makes a ton of sense.  I would avoid the large multi-nationals here as I think trade wars are coming and their cash flows from foreign operations are about to come under fire. 



* Fator Securities LLC, Member FINRA/SIPC, is a U.S. entity and a member of the Fator group of companies in Brazil. The comments below are from Brian Rogers, who is employed by Fator Securities (Brian’s opinions are his own and do not constitute the opinions of Fator Securities or the Fator group of companies).

Fator Securities LLC is not affiliated with Zero Hedge or any third party mentioned in this communication; nor is Fator Securities LLC responsible for content on third party websites referred to in this communication.

This material was not prepared by Fator Securities LLC. U.S. Persons seeking further information must contact Fator Securities LLC in New York at (646) 205-1160. This material shall not constitute an offer to sell or the solicitation of any offer to buy (may only be made at the time qualified participants are in receipt of the requisite documentation, e.g., confidential private offering memorandum describing the offering, related subscription agreement, etc.). Securities shall not be offered or sold in any jurisdiction in which such offer, solicitation or sale would be unlawful or until all applicable regulatory or legal requirements of such jurisdictions have been satisfied. This material is not intended for general public use or distribution and is intended for distribution only to appropriate investors. The opinions contained herein are based on personal judgments and estimates and are, therefore, subject to revision. Past performances are not indicative of future results.

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Hugh G Rection's picture

No paper is safe. POSX up 0.76 today, lmao!

sambro's picture

Balanced trade is essential for a healthy economy, that is true for both the US and the global economy. The current account balance should be long-term 0, it's simple as that.

It's easy to do - import certificates or tariffs proportional to the trade deficit with the respective country. The longer the cure is delayed, the worse the disease will get.

The problem is that corrupt governments want to retain unbalanced trade... it's a source of corruption.

Highrev's picture

The 3rd Currency Wars post in 2 days.


This is getting a bit ridiculous.


Add: What's with all the fuss all of a sudden. Did you just find religion? I mean, these "currency wars" have been going on for over 3 years now. And you just clued in? So, do you have a clue as to who started these newly discovered "currency wars". Any idea?



Americans, in general, have become truly pathetic.


Not For Reuse's picture

I would still love to hear one single intelligent argument in favor of shorting treasuries. I mean FFS, think about what the other side of that trade is

Manthong's picture

James Rickards has a book coming out “Currency Wars: The Making of the Next Global Crisis”.

I’ve got a copy pre-ordered on Amazon but I wonder if by the time it is released in November, will it have become a history book rather than the futurist tome I am expecting.

FreedomGuy's picture

Actually, trade always balances. One side gets currency, the other side gets the stock of equal value. What are currently noted as trade imbalances tend to be currency imbalances. This is where the exchange rates and devaluation shenanigans begin. With a convertible gold standard you could erase these imbalances. However, that requires converting from debt notes to real money.

cossack55's picture

Just my opinion, of course, but I cannot be comfortable in any kind of paper past Depends.  All phys all the time. What happens if whomever pulls a Chavez and does a little ol' nationalization number?  Maybe i'm too old.

hedgeless_horseman's picture



In my opinion, the ECB is really a proxy for the Bundesbank. The Germans, having a particular history with money printing to solve debt problems, will be loath to support much more printing and the polls in Germany so little support for this “solution.”

Wanna bet?

Since when does the will of the German people matter? 

Go Long Heidelberg Presses.

Ahmeexnal's picture

euros are no longer printed in the EU. printing was outsourced to China a while back

unless you are referring to the newly built completely cloned city of Heidelberg in China.

unky's picture

YOu are right. The author doesnt understand that the German CDU, SPD and green party all support the bailouts. Thats maybe more than 85% of the voting power. The german people dont matter, for non politician

Shameful's picture

Many analysts still labor under the delusion that the will of the people matters.  We are well into the post democratic age, the veneer of democracy is just there to keep the mass man happy. TARP proved that here in the US and it will be proven in spades in the EU, particularly in Germany, as well.

NotApplicable's picture

Exactly. IMO, the disaster that is the Eurozone will be precisely the "OMG, we have to do something!" moment that will allow the elites to pull a fast one and create a tighter union. Sure there will be some bloodshed, but given that TINA rules, you know they will try it.

Why else would Obummer give Merkel a prize if she isn't going to stab her constituents in the back by undermining her own government? The people, meanwhile, will be dealt with, and we won't hear anything about it on the MSM.

MrSteve's picture

You're wrong about going long Heidelberg presses.

KBA,  Koenig and Bauer AG is the currency press king, not Heidelberg. KBA invented the perfector press (prints both sides of the sheet in one pass) and has big global grip on engraving presses for currency and security printing. They combine engraving and offset units in the same press for economy and security. The US FRN, printed on KBA presses, are only engraved on one side now.

Heidy was owned by a German utility company as part of Germany, Inc but they got spun off into separate divisions (to facilitate a potential merger with MAN Roland?). The German banks control these two firms, so what is practical will happen.

Currently, only packaging and display ad equipment is moving in the print capital goods world. The printing industry is awash with BK'd paper companies (Abitibi and now New Page) and idle capacity equipment. IP sold off all their timberland and recently junked a 30 year distribution relationship with Ryobi's press division.

Look at the magazines in your mailbox and the USPS threatening default: not a lot of print ad happening and what is produced all asks for your email address. This says growth in print is over, time to restructure, etc. Used US equipment is no longer selling in Latin America, its classic end-of-life home.

ebooks are now outselling printed books, per Amazon.

Do not go long Heidelberg presses.

Mugatu's picture

My Chuck-E-Cheese dollars will be worth more than the US dollar in the end!

Truely pathetic. 

NotApplicable's picture

Nah, they'll maintain their peg. Those games and junk toys from China aren't free, after all.

Azannoth's picture

Currency wars are like bitch slap wars, trade wars is where the knives come out

unky's picture

The funny thing is that the Western countries (U.S., Europe) pushed the WTO rules to be adopted by so many countries (even China now) which actually forbids trade sanctions. But printing money is not included there.

NotApplicable's picture

They just call them something else.

hivekiller's picture

Currency wars > trade wars > hot wars.

Ghordius's picture

A recurring thought,
Though difficult to prove

MrSteve's picture

Check the war between Rome and Carthage, that was a trade war for the Mediterranean Sea that ended with elephants in the mountains surrounding Rome, though Rome won. Hannibals war plan counted on his troops eating their dead for provisions in the mountains where there would be no resupply.

hivekiller's picture

Hannibals cannibals proved no match for Roman meatballs

rosiescenario's picture

"In my opinion, the Swiss and Brazilian moves signaled the true beginning of the global currency wars.  The depreciation race to the bottom has begun.  Trade wars will be next. "


This currency debasement is trade war pure and simple. It is being carried out for the benefit of the multinationals fighting for exports and at the expense of the average citizen who in the end pays higher prices.


Eventually some folks may figure out that this war is really not being fought on geographic lines but on class lines.

yabyum's picture


The Heart's picture

Just started!

Tribute Memorial to the Liberty with the crew on right NOW at:



slewie the pi-rat's picture


anybody without blinderZ mighta seen some "currency war" starting when benzelbub said:  "reflation!"

the agora websites (bonner & wiggins) have been saying to get into these exact assets/stocks for years! 


The Deleuzian's picture

It will be like a bunch of monkeys trying to fuck a football

centerline's picture

oooh, I'm not touching this one.

FlyPaper's picture

Can't get a visual here.  Can you elaborate?

LawsofPhysics's picture

A little late to the party are we?

xtop23's picture

This is going to get ugly at light fucking speed -

oogs66's picture

and didn't uncle ben always warn that one of the problems in the 30's was trade wars?  how is currency war not a hidden trade war?  he has driven us to where he said we shouldn't go

NotApplicable's picture

Like all sophists, his words are contradictory on purpose. The trick is not to make the two statements too close together, lest someone notice. Because as long as you keep them separate and compartmentalized, they can sound intelligent on their own. This is why with the exception of Ron Paul, there are no coherent members in either party.

Thanks to the sound-byte driven MSM, this task gets easier every day.

jmc8888's picture

Well we should of never gotten rid of our tariffs.  So call it what you want.


Monetarism and free trade imperialism and fools game, where the people are the fool, until everybody is the fool.  About time to get back to the reality of ending monetarism once and for all, and all idiot monetarist practices, like free 'imperialism' trade.


Not monetarist dogma

NotApplicable's picture

You had a tariff? What did you with it?

sambro's picture

Well said. Balanced trade and Glass-Steagall plus the rest of the New Deal banking regulations. Also ease the red tape and other government protections for monopolies. Should do the trick in a few years.

I think they know full well what works best - it's in the history books. The game is what the game is all about...

buzzsaw99's picture

...I am a broken record on this but you should own gold and silver miners, fertilizer companies, oil companies and water companies.  Some technology stocks could make sense and reasonable exposure to Asia and Latam.  Corporate bonds of companies providing any of the products listed above (gold/silver, fertilizers, oil and water) makes a ton of sense.  I would avoid the large multi-nationals here as I think trade wars are coming and their cash flows from foreign operations are about to come under fire. 



Sutton's picture

Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.

Highrev's picture

"My bet is that they will lose control of the peg soon,"

Spoken like a true moron who has no idea what a 30 year monthy chart is.

(But the real morons are those who reproduce it and/or act upon it.)


THE DORK OF CORK's picture

As long as the monetory system is tied to oil we are in deep trouble - the monetary aggregates must decrease when there is a deline in production.

At the peak of the boom in 2006 Ireland spent 50 Billion on Its Physical built capital !!!!!!!!!!! - the problem was it was mainly roads and houses that needed cars to get to them.

Thats 7 Giant EPR nuclear reactors -  if they cost over 7 billion when completed - all we need to keep the lights on here is 2 EPRs...............

The problem is our banks only know how to produce credit opium - and that needs rising oil production.

Building Nuclear plants on credit does not work , you need rising real money production for energy utilties that are capital intensive.

If they don't change the monetory system soon most of us will starve / die of cold / disease etc. - maybe thats what they want ?


New_Meat's picture

"maybe thats what they want ?"

either "want" or "law of unintended consequences" choose your poison.

Hobson's Choice imho.

- Ned

THE DORK OF CORK's picture

Irish GNP per head ( the most accurate indicator of consumption here)

year 2007 : 37,661

Year 2010 : 28,667

Keep in mind it was still falling  in the first quarter of 2011 and in my opinion there has been no halt in the decline in the second and now the third quarter , also the extra cost of fuel / inflation since then.

They rarely mention the rise in population when giving more postive GDP figures also

Trichet : We must destroy industrial development to peserve price stability...........

Wage deflation is Inflation by other means.

sambro's picture

Ireland, Greece, etc got tied up with unproductive credit. It's called colonialism, or slavery. Default and be happy, after all, the lenders knew what they were investing in, it's their fault.

LongOfTooth's picture

<Thats 7 Giant EPR nuclear reactors -  if they cost over 7 billion when completed - all we need to keep the lights on here is 2 EPRs.........>


If you haven't already, you might want to read John Perkins' Confessions of an Economic Hit Man.

Talking countries into building 7 of something when only 2 is required is exactly the kind of thing the Economic Hit men do.  They really like doing it that way when they know the country in question is incapable of repaying the money they had to borrow in order to build 7 of them mothers.


boffster's picture

That is an awesome read. Highly recommended.

THE DORK OF CORK's picture

Building 2 reactors would have been a wise use of cheap debt back then - it would have reduced much of our natural gas imports we use to provide electricity.

Much of that Irish 50 billion spent in the year of our Lord 2006  went into unproductive enterprises (Houses and roads that require vast amounts of petrol) that are now useless or only partially used.

If we don't produce MONEY not credit to build fossil fuel independence we will be locked into the Banks/OPECs depletion fly trap forever.

JB's picture

Clone wars bitchez!

bebopgun's picture

Havent there always been currency wars. Nothing new here.