Monetary Games as the Means of Currency Wars

Central banks continue unprecedented and unpredictable monetary activity
Regulators' favorite policy - supporting demand through loans continues the process of active ruination of economy. The growth of debt load, overdue debts, the lengthy decline, expensive dollar in the midst of cheap resources and, as a result, a new period of easing and printing new money that has brought stock markets to historic maximums now. The first architect of American QE Alan Greenspan, who kept the secrets of financial inside and government machinations for many years, understands the long-term consequences of low rates better than anyone. Those whom the market calls "smart money" have not invested in American stocks for a long time. The guru gives no new pieces of advice except the one to watch gold. And - to reform rates.

However, central banks continue unprecedented and unpredictable monetary activity. Interest rates are being decreased (Australia, India, Mexico), requirements for bank reserves arise (China), deposit negative rates appear (Denmark), Singapore eased exchange arrangements dramatically. Shocking news from Switzerland, although it seemed a catastrophe, became habitual; franc moved where everyone wanted it (i.e. - downwards). Reaching the similar goal for all central banks - 2%, became the Japan's national idea. Households have successfully adapted to the presently weak yen, which yields profit to large exporters (for example, Toyota Motor Corp) and provides the growth of Nikkei Index 225 to the maximum values since May 2000. At the same time, no one thinks about the increase of the national debt.

BOJ is the leader in real asset purchases, and ECB ranks first in the voiced intentions. All the regulators' new fits of activity speak about the fact that despite large-scale amounts, the global volume of production is far from calculated values. Such instruments of monetary policy are not effective for economic growth, fight against inflation and instability.

As it turned out, in this case:

  • Base components, i.e. investments in infrastructure, labor market effectiveness, budget reforms are not created;
  • Demand disbalance deepens along with the consumer's desire to spend money - regular households are waiting for a decrease of prices and are not in a hurry to invest in large purchases;
  • Debts are not repaid and excessive indebtedness is not reformed, which leads to political instability (Greece);
  • Huge debts and weak demand threaten Eurozone and Japan with deflation;
  • Asset purchase intents (for example, ECB) can encounter elementary unwillingness to sell them.
Central Bank's active interventions for devaluation of local currency will continue until America tolerates strengthening of its dollar and until markets are ready to accept risks that are not associated with politics. However, FOMC January protocol should not be understood as a call to reevaluation of rate increase dates, and its tone is not as easy as the analysts say. Yes, FRS is worried about expensive dollar and inflation decrease, but that can hardy become the basis for the revision of dates. Moreover, there is a hope for the recovery of prices for energy resources. Despite the opinion that came that FRS is late with its decision, two sessions of Yellen's speeches will, probably, turn out to be positive and will hardly give a specific answer regarding the dates of rate increase. Swings can occur, but the general demand for dollar will not become less.

The total number of European sovereign bonds, in general, is not tied up to economy but rather to the regulation of monetary and credit policy. If once Draghi had a problem convincing the market to hold bonds, then now ECB can encounter the investors' refusal to sell state bonds in the framework of the new round of euro QE. Sale of short-term bonds by banks will take away their liquidity buffer, and, according to the same regulator's requirements, they will have to invest in other, possibly, less liquid assets. Funds (pension and insurance) are used to hold long-term debt papers in order to tamper with reinvestment; BNP Paribas, Danish ING and Rabobank, Spanish Bankinter have already declared their intention not to sell bonds.

And as much as Draghi can speak about many non-traditional influence instruments in the ECB arsenal, purchasing of state bonds has been the main means of financial stimulation so far. And it should be promoted at any cost. Reaching agreements on Greek issues can render support to euro; however, it will not change the situation in general - the pair should be sold from the current levels before Draghi's speech. So, the bankers of two global currencies have a good chance to influence the currency situation today. Let's see how they will use it.

Author: Navsher Bartash,
ForexChief Currency strategist