Emerging markets may have further reason to complain about perceived currency wars next year as central banks in rich nations become more aggressive in chasing the economic boost of weaker exchange rates.
After a year in which developing nations such as Brazil accused the US and other advanced economies of driving exchange rates down through quantitative easing, strategists at Royal Bank of Canada (RBC) say Group of 10 (G10) central banks are becoming more active in trying to lower currencies.
“We find substantial evidence that exchange rates are playing a greater role in central banks’ policy decisions,” RBC strategists Adam Cole and Elsa Lignos said in a Dec. 14 report. “It would seem that the G10 is doomed to follow EM [emerging markets’] central banks down the path of rising intervention, or at least exchange rate-driven policy.”
They found that many of the G10 central banks are increasingly highlighting currency concerns and signaling they may do something about them.
To measure that, the authors created a so-called verbal intervention index, trawling through three years of monetary policy statements and assessments for currency references. They then designed a scorecard running from zero to 10. The lowest number amounts to a mere comment and the highest refers to explicitly setting monetary policy to achieve a certain exchange rate.
The findings show that aside from the Swiss National Bank, which caps the Swiss franc against the euro, Norway’s central bankers indicate the highest level of concern by often linking a strong krone to the possibility of an interest rate cut.
Aggregating the results, RBC’s intervention index shows a reading of four, up from about one at the start of last year. A four may mean the central bank is expressing a negative opinion on currencies or that the exchange rate is a barrier to growth.