The central banker event risk for this week was highlighted by the FOMC decision on Tuesday afternoon. Predictably they did not make any changes to the actual fed funds or discount rate but the subsequent press release did make their intent rather clear. A quick read of the communique reveals that most of the language used this time was very similar to what was used in the August release with the notable exception being the change in the wording of this one phrase.
The only conclusion that one can glean from this is that the FED is extremely worried about the current state of the economy which, if not addressed promptly, could result in the US getting mired in a deflationary spiral. With this looming over their heads they seem resigned to the fact that they will have to inflate the economy by, once again, opening up the monetary printing presses, a process that the bond markets have been discounting for a while. Obviously with an increase in supply, the value of the US dollar will have to decline which would have the intended effect of reducing the true value of our debts. All that remains now is the timing of this act. The FED is probably loathe to officially embark down this path until they get more data points and until the mid-term elections are over, but if the economy continues to under-perform then November’s FOMC would be the likely launch date for QEII. Given the above scenario it is quite possible that the markets discounting mechanism could translate into a fairly rapid dollar free-fall leading up to that meeting.
There are, of course, several factors that could derail or, at the very least, slow down this event. Chief amongst them would be if the US economy stages a miraculous turn-around and all this talk about QEII becomes moot or if some financial crisis gives rise to another bout risk aversion. China might not be too keen to see their dollar investments lose intrinsic value, but given that unloading their holdings is unrealistic and given the criticism they have received for manipulating the Yuan to gain an edge in the international trade arena, their objections might fall on deaf ears. Aside from some political rhetoric they will probably have to resort to surreptitious interventions in the markets to try and stem a precipitous fall as they diversify their portfolio. Another major concern would be Europe as the ECB might not be too thrilled with a sharp appreciation of their currency but it would seem that, at least for now, their economic prospects don’t portend to be as anemic as ours and a stronger currency would have the effect of curtailing inflation(always a worry for them) to a certain degree.
The FED appears to be on the precipice of embarking on a weak dollar policy to try and inflate the US economy back to recovery. There might be protests from some in the international community, but if one were to evoke the fundamental truism that the health of the US economy is of paramount importance to the global economy then one might have to accept the dollars’ weakness as a fait accompli.
Did you enjoy this post? Why not leave a comment below and continue the conversation, or subscribe to my feed and get articles like this delivered automatically to your feed reader.
No comments yet.
Name (required)
E-mail (required)
URI
Your Comment
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. ALTERNATIVE INVESTMENTS, INCLUDING THOSE OFFERED BY ARCTOS FX LLC, ARE SPECULATIVE, INVOLVE SUBSTANTIAL RISK, AND ARE NOT SUITABLE FOR ALL INVESTORS. YOU SHOULD CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION. IN CONSIDERING WHETHER TO AUTHORIZE SOMEONE ELSE TO TRADE FOR YOU, YOU SHOULD BE AWARE THAT THE HIGH DEGREE OF LEVERAGE THAT IS OFTEN OBTAINABLE IN FOREX TRADING CAN WORK AGAINST YOU AS WELL AS FOR YOU. THE USE OF LEVERAGE CAN LEAD TO LARGE LOSSES AS WELL AS GAINS. THIS BRIEF STATEMENT CANNOT DISCLOSE ALL THE RISKS AND SIGNIFICANT ASPECTS OF THE FOREX MARKETS. THEREFORE, YOU SHOULD CAREFULLY REVIEW THE DISCLOSURE DOCUMENT BEFORE YOU COMMIT TO THE PROGRAM.
Read Full Article »