It was back on 13 April that I highlighted the breaking point for the dollar, which could lead to a dollar correction after a prolonged rally. What was that breaking point? If inflation gauges showed that the strong dollar weighed on the inflation outlook, then the dollar would begin its correction. And so indeed, shortly after, the dollar began to plunge against its European peer, the euro, as investors switched into euro longs and dollar shorts. The reason? Data suggested that the US economy wasn't growing as quickly as expected, and most inflation gauges suggested that inflation still wasn't returning.
And then, two weeks ago, the tide turned once again and investors began dollar buying once more as core inflation nudged up and the Eurozone, with the looming Greek crisis, seemed weak again. But is the dollar correction really over? Don't count on it… Continue reading "Dollar Correction Not Over"→
Last week, the Fed released its FOMC minutes, the protocol of the Fed's decision makers, and already it seems to have backfired. While the minutes thoroughly described how FOMC committee members have gradually shifted their projections on inflation and a lower Fed Funds Rate, comments that were supposed to gently assist in tilting the dollar lower have done the exact opposite.
FOMC Minutes Backfire
The Fed's statement contained two comments that were combined or written in such a way that investors immediately became wary of shorting the dollar. The first, was the remark on the fact that excess capacity and downward pressure in commodities was seen as winding down gradually thus keeping the Fed's long-term inflation target of 2% (or close to it) still intact. So far so good, yet the Fed also added a statement on what is holding back the possible rate hike and that is low energy prices and a strong dollar. In other words, the Fed outlined that a lower dollar would increase the chances of a rate Continue reading "The Dollar Breaking Point"→
More and more of the world's central banks are moving into negative interest rates and/or Quantitative Easing; the Bank of Japan has a massive ¥80 trillion in QE (per year), the European Central Bank with its estimated €1.1 trillion QE and negative deposit rates, the Swiss National Bank recently moving deep into negative territory, setting interest rates at -0.75% and now the Riksbanken, Sweden's central bank, following suit with interest rates set at -0.1%. And as this process escalates, two words dominate the commentaries: currency war. That word combination, so frequently bandied about by economists, financial analysts and media pundits, embodies the attempt by nations to devalue their currencies in order to increase exports and inflate demand. Yet despite headlines outlining how the currency war between nations can escalate inflation, in almost all major economies, inflation continues to plunge. The question is why? The answer might not only surprise you but put a question mark on the so called "currency war."
US and China Already Stopped "Playing"
One of the biggest facts that economists seem to ignore when warning of a currency war is that the world's two main players, the US and China – the two largest economies and arguably the two which started this so-called "war" – have long been out of the game. The US Federal Reserve Bank halted its massive QE program in October and allowed the US dollar to appreciate since then by more than 14% against the Euro and more than 10% against the Yen. Moreover, the Fed is seen as the only central bank that is seriously considering a rate hike, the total opposite of devaluation. China, meanwhile, perhaps the most aggressive currency manipulator in the world (with the US a close second), has not only stopped devaluating its currency but in fact has allowed its currency to appreciate so much that the Yuan has been the best performing currency in the world after the US dollar. The Yuan appreciated more than 8.5% against the Yen and roughly 12% against the Euro since October.
Although both countries aggressively manipulated their currency, their tools were somewhat different. The Federal Reserve used Quantitative Easing, which is essentially ballooning its balance sheet with printed money, a form of currency manipulation by any and all means. The People's Bank of China used to artificially lower the Yuan by purchasing dollars, which of course allowed its foreign reserves to balloon. Those were two very different methodologies, but the outcome was the same: the devaluation of the respective currency. Yet, as seen in the two charts below, China's foreign reserves have plunged by $105.5Bln from its peak and the balance sheet of the Federal Reserve has remained more or less stable, revolving around $4.4 trillion.
Chart courtesy of Tradingeconomics
Chart courtesy of the Federal Reserve
Why the War Ended
While the sense of an escalating currency war is looming in fact this war has aggressively de-escalated. Since 2007, the aggregate amount that the US and China injected into their respective economies amounted to a whopping $6.614 Trillion (not including other PBoC programs), an amount that dwarfs the current liquidity injections of the ECB, the BOJ and all the other central banks. One must wonder what is behind this dramatic change of heart which put an end to currency manipulation by the two biggest players. China, the more aggressive manipulator of the two, made a strategic decision; it no longer wants to be known as the "factory" to the rest of the world but rather it wants to become the world's largest consumer. Thus China allowed its currency to strengthen while lowering interest rates to encourage local consumption. In the US, the case was rather simple; the US has always been a consumer-oriented economy, and while it was hoped that US exports would eventually take the lead, it was actually the return of the American consumer that ended the need for devaluing the US currency.
What Could Trigger Another War?
PBoC Governor Zhou Xiaochuan has reiterated that they see no need to devalue the Yuan. As one might expect, it is inflation, yet again. While inflation in the US is stable in China it's taking a plunge, falling to 0.8% as of late. Although with interest rates at 5.35% the PBoC still has plenty of room to maneuver, one thing is clear and that is if things turn ugly in China and inflation turns into deflation, even after a rate cut, then China might go back to the good old tried and tested method of manipulating the currency. With China experiencing a prolonged deleveraging cycle, this risk exists. But until then, while the headlines may scream currency war, understand that it's a scare tactic. If anything, the currency war has dramatically de-escalated and if things don't deteriorate from here, it could mean that the currency war that everyone is busy screaming about has essentially ended.
Disclosure: This article is the opinion of the contributor themselves. The contributor does have an interest in the USD/ILS rising as of the date of publication. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.
This week was undoubtedly a busy week for FX traders, with the utter meltdown of the Russian Ruble followed by Putin’s speech, the across-the-board selloff in emerging markets and the surprise negative rate announced by the Swiss National Bank. What this week won’t be remembered for is a Pound Sterling turnaround, yet I intend to illustrate in this article that that might just be in the cards.
Across the Channel
The fact that the Pound Sterling has shed value against the almighty Dollar might not come as a surprise; after all, the Dollar has rallied across the board as the Fed turned hawkish and the economy accelerated. But what is a surprise is why the Pound Sterling, the currency of an economy which has grown at an annual pace of 3%, has been essentially flat versus its European peer, the Euro? In short, after a robust performance from the UK economy, investors are beginning to get the sense that rather than continue accelerating the UK is been dragged down by the woes across the Channel with Europe pulling UK growth potential down. Below, the two major charts that made investors ponder and Sterling stagger.
Core Inflation Tumbles
The first and foremost piece of data is inflation, but not just headline inflation which is also affected by external factors such as Oil prices (which, as we all know, happen to be collapsing) but core inflation that isolates external volatile factors including energy and food. As you can see in blue, UK Core Inflation just took a nose dive, hitting 1.2%, just 0.5% above the Eurozone’s 0.7% core inflation rate. With such a collapse in inflation expectations investors are beginning to question the UK recovery, wondering instead if growth is about to slow rather than accelerate, or perhaps that wage growth is not just around the corner as the pundits have said, and that maybe the Eurozone’s own stagnant growth is dragging the UK down along with it.
Thereafter, comes job market data; although unemployment has fallen to 6% it’s stubbornly fixed at this level and the claimant count rate, which measures the fall in unemployed (as seen in our second chart) has slowed down in pace. That had led investors to ponder that perhaps the job market is about to reverse some of its earlier job gains and that unemployment could nudge a bit higher.
Claimant Court Reverses
This has all led to one very basic question; are rate hikes in the UK really on the table next year? What with inflation in a nose dive, wages failing to rise and unemployment perhaps on the verge of a hike? Certainly, the possibility of a rate hike being pushed back into 2016 seems, especially after those readings, more probable. And that pretty much explains the flat performance of Sterling even against a battered Euro.
Retail Sales Changes the Game?
So what is the game changer? We have established the reason(s) why Sterling has been stagnant thus far but what makes investors think the game has changed? In two words: retail sales. The robust retail sales figure coming out of the UK on Thursday, a 6.4% (YOY) gain, surprised even the most optimistic investors. That unexpectedly positive figure has resulted in yet another possible scenario for Sterling watchers; say, the one in which the recent mild UK data was just a temporary bump or a minor glitch, and that the UK is actually gearing up towards another fall in unemployment, a rise in wages and maybe even a rate rise in 2015.
Matching Technicals and Fundamentals
As seen in the chart below the reaction in the market was not too late to arrive and the EUR/GBP quickly took a nose dive amid renewed Sterling bets. This could very well be the start of another push south for the pair, especially considering the formidable resistance the pair has generated and how this resistance pattern was reinforced today. But, and although this could be the signal for the start of another bearish push in the pair, more needs to happen. Next week’s final Q3 GDP reading may very well provide that fuel, that impetus, which can push the pair below the 0.777 level. However, most investors are eying December’s CPI data and 4th quarter GDP which is due out next month. Because if those two readings follow suit after the robust retail sales numbers, the 0.777 support could be broken, and as the chart illustrates below, the next support for the pair may be quite distant, creating a potentially long bearish cycle for the pair and taking the Sterling bullish bet back into the game. So, if you are in it for the long haul, be patient; Sterling just may surprise you for the better.
Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.
Interest rates, oil prices, earnings, GDP, wars, peace, terrorism, inflation, monetary policy, etc. -- NONE have a reliable effect on the stock market
By Elliott Wave International
You may remember that after the 2008-2009 crash, many called into question traditional economic models. Why did they fail?
And more importantly, will they warn us of a new approaching doomsday, should there be one?
This series gives you a well-researched answer. Here is Part IX; come back soon for Part X.
Myth #9: Inflation makes gold and silver go up.
By Robert Prechter (excerpted from the monthly Elliott Wave Theorist; published since 1979)
This one seems like a no-brainer. The government or the central bank prints more bonds, notes and bills, and prices for things go up in response. Gold is real money, so it must fluctuate along with the inflation rate.
Once again, it doesn't happen that way. Let's examine the history of inflation and the precious metals since the low of the Great Depression.
Inflation occurred relentlessly from 1933 to 1970, yet gold and silver remained unchanged over the entire time. True, the government fixed the price. But markets are more powerful than any government, and if the market had wanted precious metals prices higher, it would have made them go higher. Continue reading "Don't Get Ruined by These 10 Popular Investment Myths (Part IX)"→
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