Weekend Reads for Global Investors: Is a Global Currency War Breaking Out?

A new global currency war looks inevitable.

China’s currency, the yuan, continues to make news in recent days following last week’s surprise move by the People’s Bank of China to allow it to drop by as much as 4% against the world’s major currencies.

The move came as a surprise even to many veteran central bank watchers. The Chinese regulators have been trying very hard to regain credibility in the market after the sharp drop in stock prices in recent months. Hong Kong–Shanghai Stock Connect and the mutual recognition of funds with Hong Kong initiative were both long-expected measures aimed at attracting foreign investors and were finally implemented this year. Now the devaluation could potentially negate some or all of the benefits.

Many suspect the motivation behind the move was to smooth the path for the yuan to join the Special Drawing Rights (SDRs), the currency of the International Monetary Fund (IMF). Internationalization of its currency has always been on the top of the Chinese government’s agenda although it had pursued the objective in an extremely cautious fashion over the past decades.

The impact on global markets goes far beyond what meets the eye though given the scale of the Chinese economy as well the close ties it has forged with its global trade and investment partners. The most important and talked about potential outgrowth is whether this lowers the odds of a tightening by the US Federal Reserve this year. Goldman Sachs seems to think so. The rate hike is designed to combat inflation and prevent the economy from overheating. With a yuan devaluation, both possibilities are now less likely.

The less talked about but no less important side effect is the impact on the emerging market debt, which has already been suffering from the the strength of the US dollar. Yuan devaluation delivered another blow. An article published two months ago highlighted debt — especially emerging market debt — as the key risk in the global financial system. Without sounding like an alarmist, it feels like we have now set the timer on a bomb.

Currency traders went into panic mode last week, and most emerging market currencies have turned lower, with some, such as the Malaysian ringit and Turkish lira, down about 3% last week. As of this writing, Kazakhstan and Vietnam have also joined the ranks of nations devaluing their currencies. So the global currency war is not all hype. The race to the bottom may have just begun.

Below is a list of links from the paragraphs above as well as some of the other interesting reads I have come across in recent weeks. Happy reading and enjoy the weekend.

Markets

• “Morning Agenda: A New Global Currency War” (The New York Times)
• “How to Anger Asia, Fed in One Shot: Devalue the Yuan” (CNBC)
• “Kazakhstan and Vietnam Weaken Currencies” (Financial Times)
• “Will Recent China Devaluation Kill Yuan’s Chance to Become IMF Currency?” (Forbes)
• “Yuan Devaluation’s More about the Fed Than China — Goldman Sachs” (Wall Street Journal)
• “China Makes Debt Burden Heavier for Others” (BloomergView)
• “The Emerging World: Debt as Key Risk” (Bruegel.org)

Investing

• “The Best Investment Strategy for You? It’s the One You’re Likely to Stick With.” This is really the most precise and punchy statement I have come across on this subject. All the risk tolerance mumbo jumbo does not get the idea across to investors who need to understand it the most. (Washington Post)
• “Doomsday Clock for Global Market Crash Strikes One Minute to Midnight as Central Banks Lose Control.” This article has gained rather wide interest. Of course, any article with crisis or doomsday in its headline tends to draw traffic, but this author was honored with an Article of the Year award from the CFA Society United Kingdom in 2013. (Telegraph)
• “Dennis Gartman Changes His Mind on Gold.” I said in this column three weeks ago that gold felt more like a value trap. Since then, however, a few gold bugs I know have also started pounding the table on gold. Will they be proven right? (CNBC)
• “A Dozen Things I’ve Learned from David Einhorn about Investing” (25iq)

Emerging Markets

• This is a subject we have been writing on since last year. It is very important for investors to understand the rules of the game: Emerging market debt and equity might as well be the high-risk, high-return alternative to its developed market counterpart; and the market is a democracy where each dollar gets a vote. In a way, there is no such thing as a right or wrong valuation. It’s all in the eyes of the investors, especially those with a lot of money or influence. “Collateral Damage: Dollar Strength and Emerging Markets’ Growth” (VOX)
• The emerging markets have been hit by both the dollar’s strength and the yuan devaluation: “Stuck in the Middle”  (Economist)
• But can emerging market countries really blame China for their woes? “EM Will Suffer No Matter How China Plays Out” (Reuters)
• “Investors Cut EM, Commodity Holdings to Record Lows” (CNBC)
• “Book Review: Cracking the Emerging Markets Enigma.” I reviewed this book on our blog earlier this year after meeting with the author last year. Here’s the review from the FT. (Financial Times)

The Soft Side of Business

• “The Skills Leaders Need at Every Level” (Harvard Business Review)
• “Use These 24 Tools to Run Your Business from Anywhere in the World” (Entrepreneur)
• “The Powerful Predictor Behind Successful Relationships” (Farnam Street)
• “Why Even Smart Advice Is Wrong at Least Half the Time?” (Entrepreneur)

And Now for Some Readings Truly for the Weekend . . .

• Have you ever watched Up in the Air and thought you’d like that lifestyle? Read this and think again: “The Sad, Sick Life of the Business Traveller” (The Economist)
• A popular dating app says it discovered an algorithm to “weed out jerks.” Now all the married folks can breathe a collective sigh of relief: We’ve made it safely out of the woods in time. (Time)
• “Does Where You Live Shape Who You Are?” (PsychologyToday)

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Image credit: ©iStockphoto.com/Christian Mueller