Tags: central bank | rates | currency | economy

Currency Wars: Race to the Bottom Intensifies

By    |   Wednesday, 04 February 2015 08:14 AM

January was one of the worst months as far as central banks are concerned.

It is very difficult to decipher what a Central Bank is saying when it makes a statement. Yet, the central bankers always desire to be transparent and open about their communication. A central bank attempts to never surprise the market with its moves and desires to orchestrate every move well in advance.

Yet in January we had far too many surprises.

The Swiss National Bank kicked things off (or maybe it could be argued it was oil back last summer) when they dropped the peg against the euro, catching the markets off guard, which was then followed by the European Central Bank (ECB)'s inevitable decision to begin quantitative easing. The real surprise with that announcement was the amount of the program, which came in on the high end of the range.

This opened the way for a flood of central bank actions around the globe, including the Bank of Canada, which dropped rates suddenly. Then we had the Monetary Authority of Singapore drop its interest rates in a move to reduce its currency value.

With markets digesting that news, Greece went to the polls and elected a new government, which has been following through on its campaign promise of reversing the austerity measures required by the bailout agreement with ECB and International Monetary Fund.

Just this week, the Reserve Bank of Australia dropped its interest rate to 2.25 percent, its lowest ever. The Reserve Bank of India held its rates but had dropped its rates mid-cycle in early January, so rate change was expected there in two weeks since its surprise.

In case you are wondering why central banks are all dropping interest rates en masse, it is being done to devalue their currencies relative to the others. The notion that a cheaper currency is good for the country and will drive export up is misguided when all countries are doing the same almost all at once.

Each country is trying to make their currency worse than the other. The race to the bottom is in full swing.

In the meantime, in the real economy, the industrial production numbers came in much lower than expectation in the U.S. The spin doctors are claiming it is above 50, so technically we are in expansion mode, but who are they kidding? Many bellwether stocks are failing targets and warning about the strong dollar as the cause of missing estimates.

Chinese factory orders came in below expectations in January. The unexpected dip in orders caused traders across all asset classes to pause and take notice, as it was the first contraction in over 2 ½ years.

With all this occurring around the world as well as a definitely slowing economy, who in their right mind would believe that the Federal Reserve will raise rates this year and further crush the U.S. companies while others are busy devaluing their own currencies?

I believe in the next two to three months, the Fed will finally signal being on hold until 2016 or later. That will lead to a mini collapse of the U.S. dollar, a spike up in oil and gold and the rise of several Asian currencies — the Indian rupee comes to mind.

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January was one of the worst months as far as central banks are concerned.
central bank, rates, currency, economy
Wednesday, 04 February 2015 08:14 AM
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