Central Banks Run Out Of Easy Money Options
April 08, 2016
The main area of focus for market commentary yesterday was the rapid appreciation of the Japanese Yen, which highlights the ineffectiveness of negative rates as a way to weaken currency. The Yen has found 11% of gains against the dollar so far this year, pushing it back to levels last seen 18 months ago, and the Bank of Japan's monetary policy arsenal is running dry.
Not only does a weak currency spur export demand, it also makes Japan's multi-national corporations' overseas revenues more profitable in Yen terms. This makes their performance on the stock market better, which in turn spurs fund managers returns and furthers investments etc. etc. With such a big gain in the Yen, which is being driven by safe-haven buying, the market believes the central bank will have to intervene, which will involve dumping trillions of Yen onto the market and try and spike the currency lower.
The problem the Bank of Japan may face is that the market knows the bind they're in and is second guessing at what level the BoJ might intervene. If they get the level right, the market could make a very tidy profit and the BoJ would have made a very expensive and ineffective skirmish into the FX market.
Across the South China Sea, Shanghai stocks are heading for their third straight day of losses, which is actually the worst we've seen since January's market episode. The move lower overnight wasn't China driven, but instead a continuation of a European and then US market sell-off, which has been driven by utterances of stagflation, where the low global productivity is combined with inflation creeping back in, so central banks can't carry on easing to boost productivity for fear of fuelling inflation and can't raise rates to curb inflation for fear of curbing productivity – the proverbial rock and hard place.
Yesterday Janet Yellen sat on a panel alongside three previous Fed chairmen. Joined by Ben Bernanke, Alan Greenspan and Paul Volcker, the group reassured themselves that they were all thinking the same thing (that there US isn't in a bubble economy and that there isn't a recession around the corner) and if they're all thinking it, then it must be true! Ms Yellen did have to defend her December rate hike, which was called into question by a couple of her predecessors, but maintains that it wasn't a mistake and the US is still on a stable path. As the Wall Street Journal points out '[economic] expansions don't die of old age. Instead they reverse when imbalances throw off spending and investment'.
We're going to see this weekend whether David Cameron's Teflon suit is still as effective as ever. Yesterday he admitted to holding shares in an offshore unit trust, but also that he liquidated them before coming to office in 2010 and paying all UK taxes that were due. Labour are up in arms and shouting 'hypocrite' and we're sure the weekend press will take their time when digging deeper and grilling him accordingly.
Between now and the close of the markets this evening we've got a chunk of UK data that could once again throw Sterling into disarray. The trade balance, manufacturing and industrial production numbers are all posted at 09.30am and will all go through the 'what would happen if they left Europe' theorem. So here's hoping for some good numbers…
Have a great weekend.