The currency wars require predictable responses from opponents. Like fencing, tactics of timing, self-control, and spinning of the wheel may be observed. Attack movements include thrusts, feints, binds, extension, remise, and a possible move of in quartata. The counter attack may be one of evasion. Look out for offenses such as turning ones’ back on an opponent, fake control markings, and failing to follow the code of the hosting organization. (DBT, 2011)
A cleverly worded statement that has been said to confuse currency values was released by the G7. There has been some debate of who the source of the statement was. One must decipher from the 7 powers, who stands the most to gain from a devalued yen. The G7 consists of Germany, Italy, France, Japan, Britain, Canada, and the United States.
The articulation that sent the yen into a tailspin, per a news release of the G7 statement reads, “We, the G7 Ministers and Governors, reaffirm our longstanding commitment to market determined exchange rates and to consult closely in regard to actions in foreign exchange markets. We reaffirm that our fiscal and monetary policies have been and will remain oriented towards meeting our respective domestic objectives using domestic instruments, and that we will not target exchange rates. We are agreed that excessive volatility and disorderly movements in exchange rates can have adverse implications for economic and financial stability. We will continue to consult closely on exchange markets and cooperate as appropriate." (Statement, 2012)
If the US is behind the source of the statement, it may be a spinning of the wheel tactic in use. Lail Brainard, Secretary for International Affairs of US Treasury, indicated that the US supported Japan’s fight against deflation. Markets interpreted this to mean the yen was weak, and needed to be sold. (Schnurr, 2013) Was that a move to devalue the yen that it could be bought back at lower rate? It could be with the idea that a little clarification would drive the value back up.
If the statement was a counter attack of evasion it could have come from Japan. Why would Japan want to devalue their currency? Devaluating currency devalues debt; it also helps keep a country competitive within the market of exports. According to MoneyWeek, it’s all about the “race to the bottom.” (Frisby, 2013)
According to Marc Chandler of Brown Brother Harriman, “It is interesting to speculate who is the G7 source. It may have come from a country who feared the loss of competitiveness from a depreciating yen the most. Within the G7, this seems an awful lot like France.” (Chandler, 2013) Why would France want to devalue the yen?
Maybe the attack was a move of in quartata by France. By concealing the front and exposing the back, less harm will come to the target. Rumors were floating about a downgrade in the France credit rating. France has voiced concern over the Euros strength, but their concerns have only been brushed off by other G7 members.
The idea of “excessive volatility and disorderly movements in exchange rates” having an adverse effect on an economy, screamed sell the yen. If the finance ministers can master predicting the behavior of their opponent, the best investment may be in the currency wars. Sell high, then buy low. Once clarification was brought to the statement, the yen’s value thrust upward.
The International Monetary Fund (IMF) conditions are in place to discourage policy makers from manipulating exchange rates. With floating exchange rates, currencies are determined by supply and demand. While driving a currency down can help make exports more appealing, driving a currency up helps control inflation. Once our finalist all arrive the finish line at the bottom, then what? There’s no place to go, but up.
Chandler, M. (2013, 02 13). Choppy FX In the Fog of War. Retrieved 02 13, 2013, from Seeking Alpha: http://seekingalpha.com/article/1177381-choppy-fx-in-the-fog-of-war
DBT. (2011, 12 16). Fencing 101. Retrieved 02 13, 2012, from What is fencing: http://www.whatisfencing.com/
Frisby, D. (2013, 01 31). Will the pound fall below parity with US dollar. Retrieved 02 13, 2013, from MoneyWeek: http://www.moneyweek.com/investments/currencies/will-the-pound-slump-against-the-dollar-62430
Schnurr, L. (2013, 02 11). Yen plunges versus dollar, euro; Wall Street steps back. Retrieved 02 13, 2013, from Reuters: http://www.reuters.com/article/2013/02/11/us-markets-global-idUSBRE88901C20130211
Statement, G. (2012, 02 12). New Release. Retrieved 02 13, 2012, from Bank of England: http://www.bankofengland.co.uk/publications/Pages/news/2013/027.aspx