RBS has produced a handy guide for those that believe the current currency fracas this year will morph into what it calls “something more internationally combustible” – in other words a global currency war. As the bank notes, more countries are intervening, more are fiddling around with currency pegs and many are hiding behind a “macro prudential” flag of convenience to lend legitimacy to currency manipulation. “There cannot, of course, be multiple winners of this game,” says David Petitcolin, global currency strategist at RBS. So, which countries can put their money where their mouths are, and which countries’ rhetoric against currency strength can be followed up with action? To identify the potential players and winners in any global currency war, RBS created composite scores to measure countries’ relative intention to weaken their currency and their capacity to do so. The bank calls them the relative intervention intentions (RII) and the relative intervention capacity (RIC) scores. RII is governed by the openness of a country’s economy, export growth and real effective exchange rate (REER) valuation. Of course, intentions rise with increasing weight of exports in an economy and a less competitive REER.
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