Currency is the best global indicator

Markets moved more than could be expected on a normal day in both countries. However, the relatively small size of these fluctuations points to the utility that exchange rates have for those looking to gauge the seriousness of events.

Front-page headlines screaming ‘Army mounts coup in Thailand’ may make investors think it is time to cut their losses and sell equities they own in the country. Their mild concern might then turn to ulcer-inducing panic when they realise the stock market has actually closed so they can’t even see their value plummeting, much less sell their investments. Similarly, the man who owns a flat in Budapest seeing burning cars and riot police in the street might understandably start looking for a buyer at any price, if indeed his flat hasn’t been reduced to a pile of cinders.

However, a quick glance at the exchange rate would prove to overly twitchy investors that they are misguided. Neither exchange rate moved much more than 1%, showing that what on the surface looks like catastrophe is, in the greater scheme of things, a minor glitch.

Obviously, time and events may show that these countries are in serious trouble, that their stock markets will crash and their property market will disintegrate. Currency markets, however, are usually good indicators of an economy’s health – a lesson that governments often fail to heed. It was the UK government’s delusion that it could support the pound at an artificially high level that led to the huge losses for the country’s taxpayers at the expense of George Soros.

The Chinese, and other governments, should bear this in mind when thinking about the long-term effect of the massive currency manipulation that they are engaged in. While for now they have the economic might to continue on their current path, if things turn sour, which they have a nasty habit of doing, the Chinese authorities might find themselves in the middle of a storm that makes Black Monday look like a mild sea breeze.