Deutsche Bank’s Dire Warning On Global Trade: "The Currency War Is Futile"
By Tyler Durden
“It’s almost like the timing belt on the global growth engine is a bit off or the cylinders are not firing as they should.”
That’s from WTO chief economist Robert Koopman, and it’s a quote we’ve used on a number of occasions. Koopman is referring to the fact that for several years in a row, the rate of growth in global trade has lagged GDP growth. That’s a problem for two reasons: 1) GDP growth is hardly robust as it is, and 2) before the recent downturn, the last time trade growth underperformed the rate of economic expansion was two decades ago.
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2) What is the implication of a futile currency war for EM FX? Beware of going long currencies purely on the basis of fundamental undervaluation.
Focusing on EM, lingering growth concerns further increase the perceived need for currency depreciation. However, since currency depreciation does not translate easily into exports improvement, more currency adjustment is probably required than in the past to obtain the same growth/current account impetus; currencies must be more undervalued before substantially improving the current account. In sum, a significant undervaluation of an EM currency may not be sufficient to drive appreciation via the current account channel; rather, even more currency adjustment may be required for some undervalued currencies.
Current accounts, especially in LatAm but also in high-yielding EMEA, still reflect excessive domestic absorption. Improvements have been limited despite large scale FX depreciation. Further, what current account improvement has taken place has been mainly on account of import compression rather than exports – perhaps FX weakness has played some role in this as imports become more expensive with a weaker currency, but a majority of it reflects demand slowdown in EM. Therefore, for currencies running large current account deficits, more FX adjustment may be on the cards before undervaluations start providing material support.
3) Which currencies to be wary of going long purely on the basis of fundamental undervaluation? In EMEA, ZAR stands out as an example.
If global trade growth has collapsed and the currency war is futile, a currency that is heavily undervalued on a fundamental model like BEER or PPP could easily become more undervalued. In this context, the FEER model, which estimates misalignments based purely on the distance of the cyclically- adjusted current account balance from its long-term average, could provide an appropriate warning signal. That is, one should be wary about long a currency on the basis of BEER undervaluation if it is also showing FEER overvaluation, as FEER overvaluation signals that the current account balance is still below its long-term average and therefore has not adjusted by ‘enough’.
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We’ve said it before and we’ll say it again: central banks better figure out how to print trade, and fast.
