MARC Chandler of Brown Brothers Harriman could not have been more sniffy about the idea of a currency wars truce being declared by the world’s main central banks.

“First, a war is imagined and then an imaginary truce is declared. Really?” tweeted the FX analyst.

Real or imagined, currency wars and competitive devaluations have been the staple conversation of the FX market for decades, recently fuelled by the monetary easing programmes of the central banks of the US, Japan and Europe.

Low and negative interest rates are seen as devaluing currencies, thereby helping spur higher inflation and firmer growth. The trouble with this approach is that, in the case of Japan and Europe, their respective currencies have been strengthening of late.

Now, the hubbub is all about whether last month’s G20 meeting in Shanghai, where leaders spoke about the need to refrain from currency competitiveness, marked an agreement to stabilise FX movements for the sake of calming a

market turning over trillions of dollars each day.

For doubters such as Mr Chandler, those peddling the idea have looked at a sequence of surprise central bank decisions and constructed the only plausible theory to explain them all — they must be working in cahoots. That would be some achievement because currency wars (if you believe they exist) are long, bloody and complicated.

“There’s a ‘so what?’ about all of this,” says Simon Derrick, FX strategist at BNY Mellon. “Over the last 12-13 years, intervention hasn’t proved to have achieved a great deal.”

Yet as Mr Derrick acknowledges, in the world of FX ‘it’s every man for himself’. One country’s actions have currency consequences for another. That would be true in normal times. It is magnified in a climate of low growth, sliding inflation, high debt and meagre productivity.

If you truly believe a currency truce has been declared, you should be worried how quickly it might fall apart.

The Federal Reserve got the conspiracy theorists excited after a surprisingly dovish March meeting, seemingly bypassing its reliance on data-dependence. This came after the dollar had fallen, bolstering commodity prices and sentiment for emerging markets.

The Fed may have good reason to pause. Market turmoil is seen by some as making it more difficult to raise rates. Stephen Jen, a fund manager, says the Fed has become “not really ‘data-dependent,’ but ‘market-dependent’”.

Yet most commentators coalesce around the idea that, currency truce or not, the Fed’s dovishness may provide some breathing room for markets.

“Maybe the Fed has backed off on [rates normalisation] policy as that was the best way of easing tension in the global system,” says Mr Derrick. “That might take pressure off China outflows and bolster the oil price.”

Time is perhaps global central banks’ only useful weapon. There are numerous explanations for why Mario Draghi, European Central Bank president, allowed the euro to strengthen by putting a floor under further rate cuts for the foreseeable future.

Analysts at HSBC — firm adherents to the currency truce theory — say the ECB has “given up the fight to continually engineer higher inflation through a weaker exchange rate”.

At BNP Paribas, however, Michael Sneyd, a FX strategist, believes time will come to the ECB’s rescue, arguing that a short-term rise in the euro will reverse in the second half of the year as the ECB’s recharged bond-buying programme takes effect.

Time is short in Japan, however, where the temptation must be to get back on the currency intervention habit. That it has refrained from doing so merely fuels the FX truce argument. After all, the country is just one big yen surge away from falling off the wagon.

On balance, say analysts, it can probably resist the temptation for now: at the G20, Japan was left in no doubt that its concerns over yen strength were not shared around the table. It knows how a currency war works and how easily intervention could start one.

“There is a risk of a currency war, but it is difficult to imagine in this present situation due to the G20’s commitment not to target FX rate for competitive purposes and their strong concern on currency manipulation,” says Junya Tanase, a JPMorgan FX strategist.

China, too, can use time in its currency battle against market speculators. Military strategists joke that no battle plan ever withstood contact with the enemy. Those investors who began this year selling the renminbi might agree after what looked like winning trades soured as the People’s Bank of China unleashed its armoury.

Ensuing skirmishes have left both sides in a stand-off. In January, the offshore renminbi weakened sharply against the dollar as investors bet that capital flight from China would intensify — encouraged by the signals sent by the weaker offshore rate — and that the PBoC would be unable to burn through its reserves to limit the damage, for long.

Instead, the PBoC intervened in the offshore market, reducing liquidity in the process and increasing the pain for anyone positioned against it. Anecdotal reports also suggest there has been some clampdown on flows offshore, curbing the ability for any flight, too.

The result has been a collapse in the spread between the tightly controlled onshore rate and its battered offshore cousin, implying the renminbi bears have retreated for now, at least.

But if central banks have bought themselves time, how long will it last? And what happens if, or when, US data pick up? As Paul Lambert at Insight Investment says, while dollar weakness creates opportunities for investing in EM FX, there won’t be much conviction behind the move.

That much is clear from the way the dollar has oscillated this month — strengthening in the run-up to the Fed meeting, weakening in response to its dovish tone, then firming again as Fed members undercut the cautious tone with a series of hawkish speeches.

EM FX has moved inversely, showing how shackled it has become to dollar moves. On the back of recent dollar strength, China allowed the renminbi to record its biggest percentage drop since the first week of January.

“If the data keeps on getting better, the Fed can’t stay forever in this dovish place,” says Mr Lambert. “There might be a tradeable improvement in risk currencies, but there isn’t going to be a sustained improvement. The dollar is going to have a soft patch, but the dollar is not going to trade lower.”

For Shinzo Abe, prime minister, with the yen still firmer than the Y115/$ level Japan was expected to defend to the hilt, the temptations to re-engage on the FX battlefield are everywhere.

Mr Abe has other issues scratching away at the Abenomics shrine and turning yen strength into a liability. It is too early, say analysts, to declare the Bank of Japan’s negative interest rate policy a success or failure.

Mr Abe cannot afford further yen strengthening. In the weeks that followed the negative rate announcement — a move widely judged to be an attempt by the BoJ to remind markets of its ‘all-in’ resolve to support Abenomics and to hold the yen below Y115/$ — the yen challenged the Y110/$ level in spite of heavy asset outflows as foreign investors fled and domestic funds sought higher yields overseas.

For its part, China cannot keep the bears away forever. Sales desks report that short positions have been cut sharply from their extreme levels in January, but caution that many investors still hold trades designed to benefit from a weaker renminbi ‘just in case’, although few are clear about what might end the current detente. Most analysts are holding to their year-end forecasts, expecting the renminbi to fall as far as Rmb6.9 against the dollar.

Mr Chandler may be right to scoff at a currency truce. But currency wars feel very real for many central banks.

At least Mr Draghi is one central banker who may have fled the battle as the euro sits around $1.12. The broad conclusion drawn by Mr Derrick is that currency wars have served the ECB well enough, as the ECB talked up and then unveiled its quantitative easing programme, weakening the euro by a third from May 2014 to March 2015.

“Would they be that unhappy if it was back at $1.17? Probably not,” says Mr Derrick.

Published in Dawn, Business & Finance weekly, April 4th, 2016