The implications of a currency war are in favor of both volatility, and fundamental shifts in value. This means that there are opportunities in currency markets experiencing competitive devaluations for a clever investor to earn a profit on the shifts. By understanding how it is that currency trends impact the overall investment landscape, an investor can take on sophisticated financial positions in a way which positions them to benefit from the shifts in value from one economy to another. Just remember that this article is only here to provide inspiration for a capable investor, not recommendations.
The biggest implications of a currency war are those surrounding inflation and export prices. This means that an investor can start hunting for opportunities in the currency markets themselves. Specifically, by looking at the long-term economic policies of different governments, an investor can purchase offsetting positions in two opposing currencies to earn a profit on the difference in devaluation between the two countries.
For example, if the Japanese Yen is expected to reduce the value of its currency by 17% over the coming period, and the US dollar is expected to depreciate by only 3% over the next year, an investor could take advantage of this discrepancy to earn a profit by short-selling the Yen in exchange for USD. While this is a very direct way to earn a profit on a difference in monetary policies, it is not very sophisticated, and still includes a great deal of risk on its own. As such, we need to take it a step further, and incorporate a greater level of sophistication to the position itself.
Having looked at how taking on positions in a declining currency market can create an income for an investor based on expected differences in the rate of depreciation, we can now take a look at how it is that the actual effects of these monetary policies will actually have on the markets themselves. For example, in the above situation we looked at how it is that the expected decline of the Yen is greater than that of the USD. We can take this observation a step further by noting how it is that both of these countries export cars as competitors. Since the cars coming out of the Japan (ie. Toyota) will be sold as a function of the price of the Yen, they will come with a discount as a function of the cheaper currency, while the price of an American car (such as a Ford) will remain comparatively expensive.
Assuming those customers that are shopping for the specific features and brands associated with Ford and Toyota will still make their buying decisions based on non-price items, the only real change that will occur in the sales of either company will be a result of the price differences in these vehicles. This means that, upon correcting for the currency discrepancies, the change in sales between these two companies could largely be a function of the discount that a depreciating currency places on the vehicle itself. Under this assumption, we would predict that sales in Toyotas would increase more than those of Fords, because the Toyota cars come with an inherent pricing discount that is a function of a depreciating Yen.
In both of the above observations, we have come up with an assumption about how it is that a currency war between the USD and Yen could present investment opportunities. However, each of these observations on their own only provides us with an isolated investment position that comes with its own specific risk exposures. However, by combining both of these observations into a single investment strategy that takes into consideration both the currency and exporting implication of the competing monetary policies, we can build a much more reasonable investment position into the value shift.
Specifically, we can look at taking on a currency position that favors the USD over the Yen, while investing in a position that favors the growth of Toyota over Ford. The fundamental logic here is that the investment will earn a profit on the declining value of the Yen against the USD, and then earn a return on the sales benefits that Toyota would ideally experience as a result of the implicit discount, while protecting against the general risks of the automotive industry as a whole. However, in the position is not without its risks. For example, the reduced value of the Yen could increase the cost of materials for Toyota by more than it improves their ability to sell vehicles, and therefore create a situation where company-specific position loses money while Ford outperforms Toyota.
Alternative, the US government might decide to escalate its inflationary policy in a way which causes the USD to decline against the Yen, and therefore reduce the value of the currency-specific position. Worse yet, if such an action were to result in Ford outselling Toyota by the end of the year, the entire position will have essentially fallen apart. As such, the trick to taking on such a position is to understand its risk profile, and to be able to adjust or withdraw from the investment as the situation develops.