Currency war deemed over

The “currency war” is over, thanks to rising food price inflation and the uprisings in the Arab world, BNP Paribas Investment Partners has declared.

Guido Mantega, the Brazilian finance minister, attracted global headlines when he declared in September that the world was in an “international currency war” as governments across the planet fought to weaken their currencies in order to promote economic competitiveness.

In the ensuing months, a swathe of emerging market countries, including Brazil, Thailand and South Korea, introduced capital controls to attempt to stem portfolio inflows threatening to push their currencies higher, creating barriers for foreign investment houses. Some other states stepped up market intervention in order to hold their currencies stable.

However, BNP Paribas argued that surging food price inflation, combined with a new-found willingness by disaffected populations to confront even seemingly well-entrenched governments, meant politicians were rapidly changing course.

“For us, the currency war is over. If you have to choose between having an uprising in your country or letting your currency go to avoid food price inflation, you will let your currency go,” said Sergio Trigo Paz, chief investment officer for emerging market debt.

“Capital controls, I think, are something that is fading. Central banks will find more comfort in letting their currencies appreciate. We have shifted to being bullish on FX.”

Bhanu Baweja, global head of emerging market fixed income and FX research at UBS, made a similar argument last week, saying: “Currencies have strengthened, without prompting much loud complaint from emerging market policymakers.

“A 3-5 per cent appreciation, what most emerging market currencies have experienced since Mantega mentioned currency wars, is not nearly enough to compensate for the 20-25 per cent rise in energy and soft commodities since then, but it’s better than a 10 per cent depreciation.”

Mr Baweja saw Singapore, Indonesia, the Philippines, Brazil and Chile countries likely to permit currency appreciation.

Mr Trigo Paz speculated that the wave of uprisings could even spread to the developed world, particularly where populations are squeezed by inflation and unemployment. “It could be Europe tomorrow,” he said.