Barclays Says Climate Disaster Will Collapse Major Currencies

(Bloomberg) -- A severe climate shock in the next 50 years will wreak havoc on the global economy and upend currency markets as we know them, according to a new study by Barclays Plc. 

Analysts at the bank have published a model of emissions scenarios, along with predictions for how foreign exchange markets will be affected. In the most extreme case, they predict the Chinese yuan and Japanese yen could drop by more than 50% by 2070 because of the economic toll stemming from rising sea levels, air pollution and crop failure. 

It’s a dramatic estimate entailing unprecedented disaster and human suffering in some of the world’s most populous cities, if global warming runs unchecked. The Barclays report also shows how quantitative finance is grappling with the probabilities of climate change in asset classes slower to adopt ESG as a trading theme, such as the $6.6-trillion-a-day foreign-exchange market.

“Markets are effectively priced for a 2°C world, taking the more optimistic view on the future,” wrote Themistoklis Fiotakis and Wen Yan at Barclays. “We believe our estimates help to illustrate the scale and cross-country variation in the FX risks ahead.” 

With any financial model, especially one running decades into the future, there are a lot of unknowns and caveats. In their study, the analysts used previous studies that link climate change to economic growth forecasts, focusing on productivity and capital flows. From there, they derived predictions for currency markets.  

While the focus of the report was on worst-case scenarios, the analysts acknowledged there’s a wide range of potential outcomes. Policy action, like carbon taxes, can reduce emissions and slow the pace of global warming, they wrote. 

“Our panel estimates help broadly translate country growth damage into FX depreciation,” they wrote.  

Here’s a look at some of the main takeaways: 

Japanese Yen

• Barclays said geography is why the yen is “one of the most vulnerable currencies in scenarios of extreme climate change.” They cited the risk to densely populated cities like Tokyo, if sea levels rise dramatically. In the worst case of a 5 degree Celsius rise, the yen could fall by an average of 11% each decade, according to the model.

Chinese Yuan

• “Our estimate points to 5-7% CNY depreciation over the next 10 years, which could worsen to more than 10% per decade over time,” wrote the analysts. They flagged air pollution and the risk that policymakers will prioritize rapid economic growth over the environment.

US Dollar

• The US dollar is less exposed to climate change risk because the economy is in a better position to adapt, wrote the analysts. “Exchange rate moves are relative, which means the USD probably benefits against most economies,” they wrote.

Euro and Australian Dollar 

• In the Barclays study, the euro and “surprisingly” the Australian dollar are outperformers. The analysts said “openess to trade” was a big reason why some economies and exchange rate would be better able to adapt.
• Their model predicted 3.9% average increase per decade for the euro and 2.1% for the Australian dollar in the worst-case scenario.

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