FX THOUGHTS : Beware Of Central Banks, They Are Scared Too

Most Read Article :

Fed Officials May Slow Tightening If World Growth Disappoints
http://www.bloomberg.com/news/2014-10-12/fed-officials-may-slow-tightening-if-world-growth-disappoints.html

14 months ago, 28 Aug 2013.

“You have to remember that we are a legal creature of Congress and that we only have a mandate to concern ourselves with the interest of the United States,” Dennis Lockhart, president of the Atlanta Fed, told Bloomberg Television’s Michael McKee. “Other countries simply have to take that as a
reality and adjust to us if that’s something important for their economies.”

James Bullard, president of the St. Louis Fed, said in an interview with Bloomberg Radio that the domestic economy is the primary objective of policy. “We’re not going to make policy based on emerging-market volatility alone,” he said.

Link to what I wrote then : https://tradehaven.net/market/fed-up-of-the-fed/

There is a contradiction, I sense here as central banks begin to lose confidence in themselves.

Fed’s Plosser now says the public has come to expect too much from the Fed. What about the World ? The World will now be depending on the Fed from here to keep with an easy monetary policy to give them breathing room.
http://blogs.wsj.com/economics/2014/10/10/feds-charles-plosser-public-has-come-to-expect-too-much-from-fed/

And the ECB has admitted that rates cannot be cut much lower from here while the BoJ has been pretty much hands off and just “carefully watching”.

One by one, the regulators are backing off with the IMF most vociferous in the past week that global growth will, at best, be mediocre.

So all those trillions of balance sheets have amounted to little so far except for the US, which has managed to recover a few millions of most low quality jobs and succeeded in widening income disparity. https://tradehaven.net/market/the-changing-face-of-employment-the-lost-purpose-of-life/

Trillions on the balance sheets of the central banks

Trillions on the balance sheets of the central banks

 

I have had this doubt for a long time, writing this last year.

“For the layman, it is hard to visualise a link between buying bonds and creating jobs when all we can see are higher stock markets and richer billionaires.” https://tradehaven.net/market/fed-please-tell-us-the-whole-truth-and-nothing-but-the-truth/

What they have been hiding from us all this time and continue to do so, are the risks involved in their policies. There are risks in each of their actions and that is something we have been shunted from and as reality beckons, we still cling to the hope that they have another trick up their sleeve even as past efforts have been ineffectual.

Well, the easiest trick would be to devalue the currency and the EUR’s drop in the past month will mean we shall see better earnings out of European companies in the next fortnight because a weaker currency boosts the results of companies with offshore operations.

Hopefully better results and cheap credit would encourage companies to hire staff instead of buying back their shares.

My view of the USD has dimmed this week after the Fed’s recent comments. It would also appear that politics have come into play in monetary policy.

This time last year, the US did not need support against Russia, ISIS and Ebola. Now they do.

This time last year, it was only EM that had a problem. Now it is the US’s allies in Europe and Japan that need help.

Of the currencies in the G10, I would pick the AUD for the quickest rebound given its decline has been the most severe and market positioning has dropped massively. The carry trade helps too given that the RBA has committed to an unchanged policy going ahead.

There is a decent chance we shall break 0.89 from the multi year support levels we are sitting on right now.

AUDUSD 2007-2014

AUDUSD 2007-2014

 

After the 5.2% decline we witnessed in the S&P 500 which clocked its historic high on the day of the Ali Baba IPO, the markets are probably looking for any reason to buy.

I believe it will not be broad based and I would stick to staples and I believe commodities due for some breathing space if the USD will pause in its rally.

I am also keen to sell the USDJPY for we will not have the BoJ till month end and there is little reason to be buying USDJPY at the moment until we get a commitment from the BoJ that they will be pursuing further stimulus.

Market positioning has been a powerful force in both the AUD and the JPY and reversals shall be painful. 106 for USDJPY would be a good target.

usdjpy 10 year

My Gold target for last week at 1225 was breached and we are holding nicely above that level for the moment. I have reduced my longs and would rather play for a commodity rebound via the WTI or Brent Crude.

It would tie in nicely with a small bounce in equities.

As for the EUR and the GBP, I would play them short versus the AUD, if I had to. They are  just too close to the Fed for comfort and I do not have  a strong view on them.

Expecting that QE will eventually lead to job creation and wage hikes has always stirred an image of trying to chop down a tree with a blunt axe. But I was wrong that the market would see it that way that I saw it last year and for all the times before that.

Central bankers are human too and for their blind faith, and ours included, the numbers are not just doing it for the economy.

In this state of flux and fear, animals spirits rule like I said last week. https://tradehaven.net/market/fx/fx-thoughts-gold-bitcoins-and-the-mighty-dollar-animal-spirits-forever/

Trade on !