This Federal Reserve never ceases to amaze me. What they should do and what they do are two completely different things.
Year-over-year inflation is at a high point like we’ve not seen in years, coming in at 4.2 percent, and the Fed sees the need to do nothing. It’s like they’re just praying it will come down on its own.
The lack of activity at the latest Fed meeting — it stayed at 2 percent — killed the greenback. It will continue to do so for long thereafter.
The Fed also gave no clear indications of future direction, which the market hates. It’s better for currency traders to go on to greener pastures where there is more clear insight into a central bank’s direction.
So this really helped the EUR/USD, since European Central Bank chief Jean-Claude Trichet has made no bones about a hike. It came on July 3, a quarter-point hike.
Couple that with the Fed’s lack of aggression on fighting inflation and you have a good case for the EUR/USD heading higher for now, and that’s exactly what traders did. They’re buying this pair up like there’s no tomorrow.
They sold off the U.S. dollar and ran to other countries where inflation is also high but where they take inflation-fighting more seriously.
Our Fed either needs to shut up with their “2 percent to 3 percent comfort zone talk” or re-adjust their comfort zone.
I know it’s a tightrope walk in this stagflation-type environment. But in the end, you should do what former Fed Chair Paul Volker (he was in charge from 1979 to 1987) did: Fight inflation, even if it hurts growth in the near term.
It's the worst of two evils. If you do, at least then you’ll have a better tomorrow. If you ignore inflation for a better today, it will hurt more in the future.
So, not only did this Fed non-decision help the EUR/USD, but it pushed up certain carry trades, like EUR/JPY and AUD/JPY, since inflation is high and rates remain high.
In fact, AUD/JPY has woken up out of its slumber and has rocketed much higher lately. Also, EUR/JPY hit a multi-year high.
It has also caused scared money to run to the Swiss franc and especially gold.
Remember, money hates uncertainty, and when it sees uncertainty it will run to its safety zones. This usually includes Swiss francs (out of habit) and gold because it’s the real currency.
Everything else is, at best, just good faith in the government backing their paper.
The Fed’s decision really caused a lack of confidence once again in our stock markets, too, and has really crushed the entire market but especially the Dow Jones Industrial Average.
In fact, the Dow quickly broken its three-year uptrend line and then broke a triple-bottoming pattern near the 11,700- to 11,800-point area.
So not only are things eroding for the fundamentalists out there, but also the chartists and technicians are seeing the handwriting on the wall as well.
This means that money will flow away from U.S. stocks for the most part and into gold and Swiss francs and select carry trades mentioned above as well as the EUR/USD which is the ultimate anti-dollar.
Until the Fed decides to do the unpopular thing, which is to fight inflation, then this mode will likely stay intact.
Thank you Mr. Bernanke. Your wrong decisions are killing America and pushing up inflation not only in the U.S. but, indirectly, around the world, too.
The only bright spot I’ve seen lately is the slowing of the downslide in the new and existing housing numbers. So when this actually turns around, we’ll start to see a better day for America.
But until the Fed and housing get back on track, there are better ponds to fish in and traders and investors around the world realize this. America isn’t the only place to invest anymore. Finally, Americans realize this too.
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