THE RACE TO THE BOTTOM
Overnight the BOJ cuts rates while the RBA keeps rates steady – both surprising moves out of Asia (via Trade the News):
Surprise, Surprise
- Both and BoJ and the RBA surprised markets with unexpected rate action. First out was the RBA decision to leave interest rates unchanged in Australia at 4.50%. Earlier in the session Treasurer Swan hinted , “Cannot assume rates will be hiked today.” 19 out of 23 analysts thought otherwise. Comments implied that there was to be a hike in the short term in order to keep inflation consistent with target. RBA felt important commodity prices to Australia remained high domestically and globally the economy will ease into trend over the coming year. AUD responded by selling off about 90 pips.- BoJ announced plans to pursue powerful monetary easing through the introduction of an additional ¥5T of funding to purchases various financial assets including JGBs, corporate paper, treasury bills all speculated in the Japan press leading up to the announcement. USD/JPY responded by some temporary gains. BoJ expects the pool of funds to be around ¥35T. Domestically the economy is recovering moderately but improvement in weakening and GDP is unlikely to meet July forecast.
It looks like the global race to the bottom is heating up. Central banks around the world are attempting to devalue their currency with the hope that exports will take the place of a lack of private consumption. Of course, it’s mathematically impossible for everyone to devalue and become a net exporter. At this juncture, the only major region that doesn’t appear to be easing monetary policy in some manner is Europe. It’s safe to assume that they won’t stand by idly while global central bankers drive the Euro ever higher….The global credit crunch appears to be going along as expected. The next steps in this intricate dance usually involve some form of trade war followed by recession followed by some form of global conflict. Let’s hope history plays out differently this time around….
“Of course, it’s mathematically impossible for everyone to devalue and become a net exporter.”
Right TPC, that’s also the reason why any major currency will devalue for an extended time. But the friction against BC and the abundant liquidity can introduce wild FLUCTUATION (mean: abrupt mean-reversal and free rides) between currencies. So the $ will not burn in hell. Major currencies will move. I’am not even sure that commodities will go up…
For ECB and Euro, i’ve just received that from “UBS Morning Adviser”:
“The ECB announced that ?1.344bn worth of sovereign bond purchases settled last week under the ECB’s Securities Market Program. This represents a very significant increase on the tally for the week before and clearly suggests that sovereign bonds yields amongst issuers on the Eurozone periphery would have been significantly higher last week were it not for the ECB’s intervention.”
Sounds to me like first step of QE. But ECB is a mix of members where non-decision is the rule (sounds like little G20…)
Paging global stagflation….
So interesting how economic cycles repeat themselves through history with only minor variation…almost as inviolable as the sun rising and setting each day…
TPC — Tell me what you think the ramifications of this are? I mean, this can’t be good long term, right? But what about shorter term? It seems like for the past 2 years, when the dollar goes down, it’s rocket fuel for stocks, but, is that kind of correlation sustainable? What is you equilibrium indicator flashing these days?