Is there a post-COVID currency war coming?

A 25 percent slump in Brazil’s real comes a decade after the country’s finance minister likened Western banks’ money printing to economic warfare. (Shutterstock)
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Updated 05 December 2020

Is there a post-COVID currency war coming?

A 25 percent slump in Brazil’s real comes a decade after the country’s finance minister likened Western banks’ money printing to economic warfare. (Shutterstock)
  • Emerging markets spree raises fears of tit-for-tat interventions, capital controls

LONDON: Financial markets’ euphoric reaction to the recent COVID-19 vaccine breakthroughs and US election results is pushing some currencies up so fast that rumblings have begun about a potential new FX war.

Almost a decade after Brazil’s finance minister likened Western central bank money-printing to economic warfare, some of the conditions that led countries to weaken their currencies then look to be forming again.
Investors’ growing eagerness to buy into risky assets gave emerging market currencies their best month in nearly two years in November, stretching a run of gains that started in June.
A further extension — seen as likely after the dollar hit a two-year low on Thursday — would mark their longest uninterrupted climb since 2012.
South Korea, Taiwan and Thailand are already worried enough that they have either intervened in their foreign exchange markets or taken other steps to try to prevent fragile economic recoveries being snuffed out.
In Sweden, whose crown is this year’s best-performing currency, the central bank unexpectedly increased its money-printing program last week.


● Emerging market currencies have surged since June.

● North Asian countries already complaining about strength.

● Dollar expected to slide much further.

● Brazil, other currency war veterans out of firing line.

“I think currency war would be a bit of a dramatic term to use right now, but you could say there have been some early warning shots,” said UBS’s head of emerging market strategy Manik Narain. “And if this currency strength continues, these countries could start to push back harder.”

China is viewed as a potential hotspot for any currency conflict.

Competitive currency devaluations are blamed by economists for exacerbating the 1930s Great Depression and dragging for decades on world trade by fostering protectionism.
The cycle usually starts with tit-for-tat interest rate cuts and interventions, but can quickly escalate into capital controls or investment taxes to ward off hot foreign money like that now flooding into emerging markets.
Institute of International Finance data on Tuesday showed investors splurged a record $40 billion on stocks and $37 billion on bonds in emerging markets last month, a spree that was more than the previous three months combined.
The Mexican peso, Brazilian real, Turkish lira, South African rand, Russian rouble and Polish zloty all jumped between 5 and 10 percent, adding to 5 to 12 percent leaps in China, Taiwan and Korea’s currencies since June.
It is not only the expectation that COVID-19 vaccines will normalize trade, travel and commodity prices driving the trend.
Low global interest rates mean developing countries are among the few places left where investors make positive returns on bonds, while the boom in electric cars and automation has seen money pour into Asia’s big microchip makers.
Global trade is expected to see the first expansion next year in three years, with the hope too that US President-elect Joe Biden’s government will be more predictable on that front.
“If you look at the areas in which potential currency wars could break out it would be the areas which have attracted the most capital flows or the most equity flows,” PIMCO’s head of emerging markets portfolio management, Pramol Dhawan, said.
He cited Taiwan, South Korea and China as the main hotspots, and potentially India going forward. It has already stacked up $85 billion of dollar reserves this year, Narain at UBS added, helping keep the rupee on the leash.
It is usually the pace rather than the extent of FX moves that lead countries to act.
When Brazil’s Guido Mantega declared a currency war had broken out in September 2010, the dollar had lost more than 10 percent in around three months. And it didn’t stop there, falling 17 percent by June 2011.
This time around the greenback is down 11 percent in eight months. But US investment bank Morgan Stanley thinks it is still 10 percent overvalued and Citi forecasts a record 20 percent drop next year as economies recover and the Federal Reserve continues stimulus.
IIF chief economist Robin Brooks doubts even that kind of move would trigger a full-blown currency war.
Taking away the 8 percent leap in China’s yuan, EM currencies are still down 5 percent this year, and some of the hardest hit, like Brazil’s real and Turkey’s lira, are down 25 percent and worth a fraction of what they were a decade ago.
“Honestly, if I were an EM policymaker, every day where my currency was strengthening I would be happy,” Brooks said, noting that a stronger currency also makes it cheaper to repay the dollar-denominated debt that has been piling up.
Nevertheless, he thinks the euro and the yen will be shoved higher, requiring the European Central Bank and Bank of Japan to respond. China’s reaction will also be watched closely, while Thailand’s statement that it is watching the baht’s rise “24 hours a day” highlights the building tensions.
“Our concern is the speed of the adjustment,” Thailand’s central bank governor, Sethaput Suthiwart-Narueput, said last week. “It has been largely nothing to do with us.”

Intel avoids outsourcing embrace, investigates hack of results

Intel avoids outsourcing embrace, investigates hack of results
Updated 22 January 2021

Intel avoids outsourcing embrace, investigates hack of results

Intel avoids outsourcing embrace, investigates hack of results

The incoming chief executive of Intel Corp. said on Thursday that most of the company’s 2023 products will be made in Intel factories but he sketched a dual-track future in which it will lean more heavily on outside factories.
The lack of a strong embrace of outsourcing from new CEO Pat Gelsinger drove shares down 4.7% after hours. Shares rose 6.5% during regular trade, when the results were released ahead of the close. The company said it was investigating “non-authorized” access to some of the results, with the Financial Times quoting its chief financial officer as saying the microchip maker had been hacked.
Intel also forecast first-quarter revenue and profit above Wall Street expectations, continuing to benefit from pandemic demand for laptops and PCs that have powered the shift to working and playing from home.
Gelsinger said he was “confident that the majority of our 2023 products will be manufactured internally” though he also said the use of outside chip factories is likely to increase “for certain technologies and products.”
Intel has been considering since last July whether to drop its decades-old strategy of both designing and making chips by turning for help on its central processing units, or CPUS, to “foundry” manufacturers. Those partners could be Taiwan Semiconductor Manufacturing Co. and Samsung Electronics. Intel’s manufacturing technology, called a 7-nanometer process, is expected in 2023.
“We didn’t get our answer on which foundries and when,” said Patrick Moorhead of Moor Insights & Strategy. “They pushed the can down the road.”
Kinngai Chan, analyst at Summit Insights Group, said Intel is not likely to outsource its flagship chips.
“Intel’s 14-nanometer chip transistor speed has always been faster than what any foundry can offer even at 7-nanometer,” Chan said. “We believe it will increase its use of external foundries over-time — just not for its large-core CPUs.”
Keeping manufacturing in-house means higher investments. Bernstein analyst Stacy Rasgon questioned whether Gelsinger, currently the chief executive of VMware Inc. who previously spent 30 years at Intel and announced his intention to return just last week, has had sufficient time to dig into the issue.
“It was pretty obvious they were trying to borrow his credibility” when Gelsinger endorsed Intel’s delayed 7-naonmeter technology, Rasgon said.
Intel’s decision coincides with US lawmakers having passed bipartisan legislation to fund US chip manufacturing. But the new law has yet to specify funding levels or recipients, and Forrester Research analyst Glenn O’Donnell said Intel might take the opportunity to solicit US government support for domestic manufacturing.
Boosted by a new high-end PC processor, Intel regained some momentum in the PC market, with volumes of PC chips rising 33%, faster than the 26% rise for the overall PC market, according to data from IDC.
Data center group sales, which powered Intel’s growth over the past several years, were $6.1 billion compared with analyst estimates of $5.48 billion, according to FactSet data.
But sales to cloud computing customers, some of the largest and fastest-growing purchasers of data center chips, were down 15% in the fourth quarter. Data center chip operating margins were 34% in the quarter, down from 48% a year earlier.
“We think (data center) operating margins are going to improve as we get toward the second half of the year, when we expect to see a rebound in cloud” chip sales, Intel Chief Financial Officer George Davis said.
The company also raised its dividend by 5%.
The chipmaker said it expects fiscal first-quarter adjusted sales of $17.5 billion and adjusted earnings per share of $1.10, both ahead of analyst consensus, according to IBES data from Refinitiv.
Fourth-quarter revenue of $20 billion and adjusted earnings per share of $1.52 also beat Wall Street targets.