Currency Wars...?
A handful of emails & online conversations with regards to Forex trading in current economic conditions have prompted me to reply by way of this article. Noticed of late that many find it increasingly difficult to make profitable trades. Have noticed myself since late 2010, that Fundamentals & Technicals aren't aligning as they should.
Some ask me...
- if I think it will become tougher to trade profitably in future?
- if trading is even profitable to begin with?
- if the Forex Market is manipulated by certain groups/organizations?
...& I am sure many of you may have your own version of doubts.
before I go in-depth, here are my short answers to the first two questions above,
- it has never been easy to trade profitably in the past, it is not easy to trade profitably at present & it never will get any easier to trade profitably in the future.
- trading is profitable in the long run, if done properly with controlled risks & proper money management. The key words are - Long run, controlled risks & money management. Also, just because you can trade anywhere, at any time & as often as you like, doesn't mean you have to.
Having covered the crucial parameters that lie within our control, let me now attempt to answer the third question, forces that are beyond our control... namely the World Economic Stimulus a.k.a Market Manipulation.
Market Manipulation in Disguise...
You may have heard about the term Currency Wars... also known as
Competitive Currency Devaluation. Countries compete against each other to achieve a low exchange rate for their own currency. As the value of a particular currency falls, so too does the real price of exports from that country. Making that country's goods more favorable internationally. Imports become more expensive, hence, domestic industries and national employment receives a boost. However, the price increase in imports can harm citizens' purchasing power. The policy can also trigger retaliatory action by other countries which in turn can lead to a general decline in international trade, harming all countries in the World. Hence, the term,
"Currency Wars".
Central Banks, Finance Ministries & Government have of late intervened in the Currency Markets more frequently, excessively & aggressively...
The reason why many may find it increasingly difficult to trade in recent months/years, is because we are no longer living in a World where Man let nature take its own course. Just for the record, for the purpose of trading, when I say
Nature, I am referring to the
Natural Market Forces.
Congestion and Ranging this past months for so many of the market's favorite trading assets (equities, commodities, major currency pairs) hides a critical fundamental fact: that investor sentiment is in control. It just so happens that there isn't a decisive view from the masses as to whether it is time to load up on higher yielding assets or get out of expensive positions.
Hence, we are now, or in fact, have been, since late 2010, in an extended period of Indecision.
Periods of Indecison naturally cause
Periods of Confusion. And what do we get when you put Indecision & Confusion together over an Extended period of Time...? Will leave your Individaul Creativity answer that question.
Stimulus Around the World:
...a closer look at the Currency Wars
UNITED STATES of America:
so far in the USA... Monetary Policies
- QE3 Infinity (September'2012)
the most recent stimulus program that needs no explanation...
- Operation Twist (September'2011)
this is the purchases of longer dated Treasuries using proceeds from sales of shorter maturity Treasuries
- QE2 (October'2010)
this is the purchases of longer dated Treasuries
- QE1 (November'2008)
this is the purchases of mortgage backed securities & longer dated Treasuries
so far in the USA... Fiscal Policies
- Tax Cuts & Benefits (December 2010)
Payroll Tax cuts, Extension of Jobless benefits & Bush Tax Cuts.
- Recovery Act (February 2009)
Tax Cuts, Transfers to State Government's infrastructure/project spending.
- TARP (October 2008)
Recapitalization of Banks/Finacial Institutions
Policymakers in the world’s largest economy have undertaken large-scale measures on both the monetary and fiscal fronts since the Lehman collapse.
EUROZONE:
In the Eurozone, the bulk of stimulus efforts have been concentrated on the monetary side. Large deficits and high Debt-to-GDP ratios in many Eurozone countries, in addition to fiscal restrictions under the Stability and Growth Pact, ruled out the possibility of significant fiscal efforts.
The two main monetary efforts focused on:
(1) purchase of government debt issued by peripheral Eurozone nations.
(2) longer-term loans to banks at low interest rates.
In addition, Eurozone leaders have launched a number of bailouts for peripheral countries.
so far in the EuroZone... Fiscal Policies
Bailouts...
Greek Debt Swap (Feb. 2012)
Greece II (Feb. 2012)
Portugal (Mar. 2011)
Greece I (May 2010)
Ireland (Nov. 2010)
- Spanish bank recapitalization (Jun. 2009)
the establishment of bank recapitalization fund.(FROB)
- French stimulus (Feb. 2009)
Infrastructure Projects.
- German stimulus (Feb. 2009)
Tax cuts, Tax rebates for purchases & public works investments.
so far in the EuroZone... Monetary Policies
.... and many more tiny pockets of stimulus every now and then, sometimes I feel lost in a sea of policies.
- LTRO II (Feb. 2012)
3-year loans to banks at 1% interest rate.
- LTRO I (Dec. 2011)
3-year loans to banks at 1% interest rate.
- Securities Markets Programme - SMP(May 2010)
this is the purchase of government bonds of peripheral European countries.
The ECB’s unconventional measures – combined with Eurozone leaders’ efforts to push through a Greek debt swap and to introduce stricter budgetary rules – have led to some degree of improvement in market sentiment in Europe. Amid improved market confidence, the ECB is now considering suspending the SMP and has even resumed warnings about inflation. Economic growth is slowly creeping towards death. Importantly, Germany’s economy has been contracting since the 4th quarter of 2011 – implying that at least the existing loose policies may continue into the foreseeable future... a.k.a
"kicking the can down the road"
JAPAN
Overcoming challenges ranging from disaster recovery to a strong Yen, both the Bank of Japan and fiscal authorities have shown a degree of coordination in their stimulus efforts.
On the monetary side, Japan has both expanded existing asset-purchase programs and created new ones, especially in the wake of the March 2011 earthquake. The government has also responded in kind, crafting 4 special budgets to support post-disaster economic recovery. In addition to these initiatives,
Japanese authorities have intervened at least 3 times in the currency markets in 2011 to shield exporters hurt by a strong Yen.
so far in Japan... Monetary Policies
- Disaster Area Funds Supplying Operation (April 2011)
this is a program to inject funds to financial institutions in areas affected by March'2011 earthquake to support reconstruction efforts.
- Asset Purchase Program (APP)(October 2010)
this is a major effort in purchasing government bonds, corporate bonds, J-REITS & credit loans.
- Growth supporting funding facility (April 2010)
this is a national facility to support research & development/innovation so as to provide support towards employment & national GDP.
so far in Japan... Fiscal Policies
- Reconstruction Budgets (2011-2012)
a total of 4 extra government aided budgets to fund reconstruction efforts.
- Credit line to Corporations (August 2011)
this is the Credit line given to help Japanese firms struggling with strong Yen.
UNITED KINGDOM
In the face of mounting budget shortfalls, and with the Cameron government’s commitment to deficit reduction, direct fiscal stimulus in the UK has been modest. However, British taxpayers have spent or committed over half of the country’s annual economic output in bailing out some of the UK’s largest lenders, including Lloyds and Royal Bank of Scotland, which had come under pressure from souring real estate
loans. Meanwhile, the thrust of stimulus efforts has been the Bank of England’s Asset Purchase Facility.
so far in the UK... Monetary Policies
- Asset Purchase Facility (APF) (January 2009)
this is the purchase of government & corporate bonds & asset backed securities.
so far in the UK... Fiscal Policies
- Stimulus Package (November 2008)
VAT & other Tax Cuts and public project spending.
- Bank Rescues (October 2008 & still on-going)
Support for banks/financial institutions including share purchases, asset guarantees & government loans.
CHINA
Immediately following the collapse of Lehman Brothers in Sept. 2008, Chinese policymakers launched a
4-trillion Yuan stimulus package aimed mostly at Public Housing & Infrastructure projects. However, authorities in the world’s second-largest economy also provided further stimulus by directing state-owned banks to increase lending, leading to new loans of at least 8 trillion Yuan in both 2009 and 2010.
Since the stimulus package, there have been signs of asset bubbles in the Financial and Real Estate markets, leading Chinese policymakers to pursue tighter policy – including interest-rate hikes and reserve requirement increases – for much of 2011.
Now, amid signs of an export and consumption slowdown and with inflation under the government’s 4-percent target, policymakers have undone some of the tightening.
Future policy will continue to strike a delicate balance between several, often conflicting objectives, including controlling inflation, mitigating economic slowdowns, and preventing asset-price bubbles.
AUSTRALIA & NEW ZEALAND
Despite signs that the strong Aussie is affecting employment in manufacturing and non-mining sectors of the economy, conditions in either country are still far from warranting large-scale stimulus. In addition, both
Australia and New Zealand have set balanced budget goals, for 2013 and 2015, respectively. As a result, Interest Rates will remain the primary tool of policy adjustment.
SWITZERLAND
Switzerland’s efforts are mainly focused on combating the strength of the Franc and the looming deflation threat. Its efforts have taken place primarily through the Swiss National Bank, and have ranged from foreign-currency purchases – 54 billion Francs in 2011 alone – to setting an exchange-rate floor for the Franc versus the Euro. The SNB has also increased sight deposits – a proxy for liquidity in the Swiss
financial system – to 200 billion Francs.
The discussions surrounding further action by Swiss policymakers remains focused on the possibility of an even higher exchange-rate cap and of negative interest rates. The SNB provided few hints of any plans so far, but the Swiss central bank has surprised market in the past.
