Stay informed with free updates
Simply sign up to the Currencies myFT Digest — delivered directly to your inbox.
This summer, the yen is stoking market jitters. For as the US dollar has rallied amid expectations that the country’s rates will remain higher for longer, the Japanese currency has slid to ¥160 a dollar — sparking furtive intervention.
Thankfully, it has now stabilised around ¥157. But as investors warily wait to see what the Tokyo government does next, they should also look west, towards Beijing.
On Wednesday, the renminbi hit a six-month low of 7.2487 to the dollar, and reports circulated that China’s state-owned banks were quietly buying the currency to combat further decline.
Thus far, it seems that Beijing is reluctant to let the renminbi weaken further, let alone repeat the saga seen in 2015 when there was a dramatic devaluation. This is apparently due to concern that such an event would spark capital flight — or so I was told by analysts and government officials in Asia during a trip there this week. “They might let it drift lower, but they don’t want a market shock,” one Asian government official said.
But it will be interesting to see what happens next with the renminbi — and yen. One reason is that this all offers a timely reminder to investors that they should prepare for the reasonably high — and rising — risk that currency turmoil will create market jolts this year.
That might sound entirely obvious to anyone (like me) who experienced the 1997 Asian crisis; or to someone in a country such as Nigeria and Turkey, both of which have already experienced currency swings this year.
But it is not necessarily obvious to investors who cut their teeth in the past decade, since there have not been any dramatic storms between major currencies for some time.
Yes, the dollar has strengthened by 10 per cent on a trade-weighted basis in the past three years. However, this ascent has been fairly stealthy and steady. The days when markets gyrated around the antics of “Mr Yen” (the nickname for Eisuke Sakakibara, Japanese vice minister for finance in the 1990s) or George Soros (the hedge fund trader who attacked sterling) are long gone — almost retro.
But one secret of finance — like fashion — is that what appears retro can sometimes unexpectedly return. And shifts in the tectonic plates of the global political economy could deliver new currency shocks.
We are moving into a period of new monetary policy divergence, after a spell in which central banks have moved in sync. Although the European Central Bank is poised to cut rates next week, the Federal Reserve seems unlikely to follow suit soon — and the Japanese are more likely to raise.
Meanwhile, protectionist and mercantilist trade policies are coming back into vogue, creating the risk of future currency wars. There is no sign that Joe Biden’s White House wants to indulge in this. But Robert Lighthizer, a key adviser to Donald Trump, believes that the dollar is far too strong — and wants to weaken it markedly if Trump wins the election in November.
And with Beijing now determined to boost growth by increasing exports, it might be tempted to weaken its currency, too — particularly since the renminbi has recently strengthened against other Asian currencies. Indeed, I am told that some hedge funds are actively placing bets on a devaluation later this year. If so, expect nasty chain reactions.
Hopefully, such predictions will turn out to be wrong. But the chatter highlights another reason to watch the renminbi: uncertainty around how much the Chinese government desires to undermine the dominance of the dollar.
Some (worried) American officials think this is already occurring. Russia’s President Vladimir Putin has pledged to use the renminbi instead of the greenback — and as a result “in 2023, the renminbi became the most popular currency on the Moscow Exchange, beating even the US dollar”, according to the Carnegie Institute.
Some other emerging markets governments have made noises about following suit: the Maldives, say, recently pledged to trade with China and India in renminbi and rupees. “At the end of March this year [the renminbi] accounted for 53 per cent of cross-border payments and receipts in the world’s second-largest economy [ie China],” says a report from the Hinrich Foundation, citing calculations by Visual Capitalist. “The dollar now stands at 43 per cent [in these flows], down from 83 per cent in 2010.”.
However, data from the Bank for International Settlements suggests that if you look at the world as a whole, the dollar accounts for 89 per cent of all trade invoicing in 2023 — a proportion that is actually higher, not lower, than the 87 per cent recorded in 2013.
And this week China’s Bank of Communications and Renmin University released a striking survey of Chinese companies which suggests that half of these cannot use renminbi for cross-border trade. Apparently, 64 per cent blame this on “complexities in [economic] policies”, 40 per cent cite “capital flow barriers” and 20 per cent decry “a lack of hedging tools”. In plain English: they fear the currency is politicised and/or will weaken.
Maybe these perceptions will change. But the key point for investors is this: just because major currency markets have been quiet(ish) in the past decade, don’t assume this will continue. Tensions are building in the global economy that will not be easily resolved, in Asia or anywhere else.