Courtesy of the Bank of Japan, the currency war has heated up. With the yen falling 14% against the USD since November, it certainly seems that the Japanese are winning the war, but when it comes to a competitive devaluation, there are no real winners. We have been in the midst of a currency war for some time now, with some central banks devaluing their currencies through Quantitative Easing and others responding with intervention. At a time when growth is a premium, every country could use a weaker currency. A stronger currency can strip away the meager of amount of growth that most countries are expected to enjoy this year, which is why central banks have been fighting hard to prevent their own currencies from appreciating.
While the Federal Reserve, Bank of England, European Central Bank and the Bank of Japan have been particularly guilty of expanding their balance sheets and in turn devaluing their currencies, the USD, GBP and EUR have not necessarily lost value over the past year. The only reason why there is renewed talk of a currency war is because recently, government officials have become more vocal and are attempting to talk down their currencies, raising concerns about potential currency intervention. However, when it comes to a currency war, not everyone can be a winner. Winning a currency war requires being willing and able to put your money where your mouth is, and the Federal Reserve and the Bank of England certainly don't qualify. Neither of these central banks is apt to go beyond verbal intervention, and even then, keep currency comments to a minimum. The European Central Bank is a bit more willing, but according to President Draghi's comments last week, the EUR/USD is not overvalued and instead close to its long-term average. On the other hand, the Bank of Japan or the Japanese government are both willing and able to drive their currency lower. Generally speaking, the central banks with the greatest amount of reserves are the most apt to intervene, and there's plenty of them in Asia.
At the end of the day, if we have central bankers firing currency comments back and forth, the most likely outcome is a narrower trading range for the currency pair, which may be the best that everyone can hope for.