Donald Arthur Hodge, one of the last surviving veterans who fought in WW1 once said – “Nobody wins in a war, they lost but we didn’t win.”
This phrase is certainly not new, with many iterations floating in various literature writing about the horrors of war. Everybody knows that even winners of wars suffer casualties, no matter how minute. In the recent Operation Iraqi Freedom, in which George Bush Jr. famously took a photo with the banner “Mission Accomplished”, the US suffered more than 3K deaths during combat despite fighting a severely under-armed, disorganized Iraqi army. There is simply no flawless victories awaiting victors in war, and this truism extends not just to physical combat, but economic warfare that everybody is talking about now.
Following G20’s meeting in Moscow last weekend, countries agreed not to participate in “currency warfare”, in which countries devalue their respective currencies artificially to obtain unfair competitive advantage for their exports against their global neighbors. Since then however, we’ve seen numerous Central Banks coming out to tell the world that they are ready to intervene if their currencies appreciate due to competitive pricing. First we have RBA, then Bank of Korea, today we have RBNZ and now Bank of Thailand is saying the exact same thing. Everybody is showing their guns as deterrence against the eventual commencement of war.
Every single war cost money. In “currency war”, the cost is rising inflation as that is the natural conclusion of bringing your currency/interest rates lower. In this regard, the cost may be too high for many countries to bear. In the latest interest rate decision, Bank of Thailand held its policy rate at 2.75%, with 1 voting member in favor of rate cut against 6 others. Inflation pressure remains a concern as asset prices continue to grew, albeit rate of growth has decrease.
Baht strengthened slightly following the rate decision. It is worthy to note that reaction to the news is more muted compared to early Asian trade which saw Baht strengthening 3 cents against USD without any news push. Perhaps the rates have already been discounted and priced into current levels. Another interpretation says that traders are not convinced that BOT will not be able to hold rates for long, and hence there is reluctance from traders to long Baht from here. If that is true, then the market is telling us that they believe Currency Wars will be starting soon, and we’ll be seeing mass rate cuts from various Central Banks in the near future. Ironically, the Baht may hold more advantages against the USD as the FED may be running out of ammunition to devalue the USD. In this war, Interest Rates are weapons and BOT has that in spades.
NZD/USD – RBNZ joins “Verbal Currency Wars” 
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