It’s not
often one can turn to Italian philosopher George Santayana to offer some
direction for the foreign exchange market, but I feel on this occasion it is
justified, because George nailed it.

There is so
much noise at the moment around currency manipulation (of the “official” kind I
hasten to add, not the “private” that has provided so much grief for the FX
industry over the past four years) that anyone might think it’s a relatively
new phenomenon. It’s not.

The only
real difference between now and the 1980s (apart from the hair and fashion
styles) is that back then the central banks generally agreed to manipulate
exchange rates through concerted intervention and the odd (Plaza, Louvre)
accord. There was a coordinated approach to exchange rate manipulation that
doesn’t exist now – today it is very much a competitive thing.

Rather than
go into the frankly boring and ostentatious politics around who is and is not
playing around with the currency, however, I wanted to delve into the claim by
the US that Germany is a currency manipulator because the euro is too weak.

Economists
undoubtedly understand this and can explain it better but I have what could be
seen as a rather quaint and old-fashioned view of things – I actually believe
markets are generally independent and set the appropriate level for exchange
rates based upon the basic economic premise of supply and demand!

It’s all
very well the simplistic administration in Washington throwing out more slogans
and random accusations, but can the claim against Germany stand up? Taken in
isolation the euro does not reflect Germany’s economic performance, I agree,
but it seems to have escaped the notice of those in the US corridors of power
that Germany is only (a large) part of the Eurozone (I estimate around 30% by
GDP).

If I look
at the world through the prism of a trader I don’t see anything wrong with the
level of the euro. It is dealing with the uncertainty of the UK leaving the
European Union, it is also facing crucial general elections in France, Germany
and the Netherlands, any one of which could derail the whole project.

Economically
I can’t see much good on the horizon (we are about get into the next round of
the “will they/won’t they” debate over extending the Greek bailout) in fact
whichever way you look at it the Eurozone economy looks decidedly average!

What
politicians often forget – and this brings me back to George Santayana – is
that markets are, generally, very good at reflecting fundamentals.

In the
1970s and 1980s the FX industry was assaulted by politicians from all states
and sides of the spectrum, in fact it got so vitriolic at one stage that David
Clark, then president of ACI, actually wrote to German Chancellor Helmut
Schmidt to defend the industry.

So rather
than look to shoot the messenger, for what is really being claimed is that
EUR/USD is being mis-priced by the market, perhaps the politicians and their
cronies could actually take a look at the real problem?

For what
the Trump administration spokespeople are really saying is that they don’t
believe in the Eurozone or the single currency and that to suit their own ends,
it should be broken up, or the euro artificially strengthened (which would be
manipulation of course) to the extent that more than just one or two peripheral
Eurozone nations face a further and enduring economic crisis.

This should
not necessarily be read as a column of support for the euro – I actually wrote
a piece in 1998 when I was still in markets (to my eternal shame it was for
another publication!) that said if the euro was launched with the planned 11
nations as members it was destined to be a weak currency. My argument was that
several nations had not (and never would) achieve the Maastricht Criteria and
as such there would always be economic imbalance.

I stand by
that view, for I still believe the euro hasn’t succeeded, and it probably will
not be pronounced a success (in terms of delivering economic stability and
equality) for decades to come.

So the
problem here is not Germany manipulating the euro – that is a nonsensical
claim, especially given the independence of the European Central Bank – it is,
yet again, politicians creating confusion in markets through their blustering.

It does
seem as though, at fairly regular intervals, politicians wake up to the
importance and usefulness of exchange rates, perhaps on this occasion the 15%
drop in sterling – which will more than make up for any WTO-inspired tariffs
and also make it much cheaper for US companies to pay their UK staff compared
to their European brethren – has triggered it?

Either way
I sense that the foreign exchange markets are, once again, going to be in the
firing line from politicians. And that, finally brings me to George Santayana,
for he wrote, “Those who cannot
remember the past are condemned to repeat it.”

The FX market structure is different and the global economy is a very
different place, especially with the rise of China, compared to the 1980s. The
actors on the political stage have also changed since that time of course, but
their rhetoric is very, very, old school.

Colin_lambert@profit-loss.com

Twitter @lamboPnL

Twitter @Profit_and_Loss

Colin Lambert

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