AXA IM: The possibility of some broad-based monetary and currency disorder

AXA IM: The possibility of some broad-based monetary and currency disorder

25 maart 2024

Monetair beleid Valuta Recessie (dreiging)
Outlook vooruitzicht (12) crisis storm op komst

AXA Investment Managers explores the possibility that some broad-based monetary and currency disorder could be a consequence of another protectionist push in the US, with a succession of competitive devaluations.

'We think that exchange rate considerations are going to increasingly weigh on policymakers outside the US as the risk of a generalised trade war 2.0 is mounting,' Gilles Moëc, AXA Group chief Economist and Head of AXA IM Research, says in his weekly Macrocast. 'We should brace ourselves for an intensification of trade wars if Donald Trump is re-elected,' he adds.

Beyond the convergence of central banks in the short term, Moëc thinks there is a distinct risk of monetary and currency disorder as another trade war may be looming with the US presidential elections ahead. Even if they are not necessarily facing the same quantum of additional tariffs on their exports to the US, China and the Euro area may be tempted to allow their currencies to depreciate to maintain their competitiveness. This could be all the more tempting that spontaneously monetary policies could diverge from the Fed’s, as cyclical conditions in the US are stronger than in most of their key trade partners, and levying additional customs duties would in any case lift price pressure on American consumers. Even within NAFTA, tension could rise.

The countdown to rate cuts is on well outside the US as well. The Bank of England surprised – again – last week as it completely reversed its February hawkish tilt with a plainly dovish message last week. 'While the BoE remains concerned with the strength of the labour market, the downward revision in the inflation trajectory, has tilted us into pencilling in the first cut by the BOE in June instead of August,' Moëc explains. The Swiss National Bank chose not to wait and delivered a surprise cut last week. Moreover, the central bank of Mexico has already chosen to cut without waiting for the Fed, as capital inflows attracted by the perspectives of near shoring could excessively raise the already appreciating peso exchange rate.

'A succession of disorderly competitive devaluations could ensue across large swathes of the world economy, potentially intensifying support for even more protectionist measures, both in the US and outside the US,' Moëc concludes

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