Tags: michael pento | federal reserve | global | currency

Michael Pento: More Fed Tapering Will Spark Currency Chaos

By    |   Wednesday, 29 January 2014 11:08 AM

Fasten your seat belts for more financial turmoil and currency chaos this year, advises a fund manager who correctly predicted the recent emerging-markets plunge.

"I expect massive disruptions in equities, interest rates and currencies this year as the baneful consequences of massive central-bank manipulation of markets begins to manifest," writes Michael Pento, president of Pento Strategies, in an article for the Huffington Post.

In a Huffington Post article on Nov. 25, Pento said the expected end of the Federal Reserve's quantitative-easing (QE) program would prompt the dollar to soar against emerging-market currencies, sending emerging market-equities and other interest rate-sensitive investments into a free fall.

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"The sad truth is that global central banks have partaken in unprecedented intervention into the functionality of markets and that has now set the stage for massive and destructive moves in currencies and interest rates," Pento says.

"But it's not just emerging markets that will feel the pain. I next predict the unwinding of the colossal yen carry trade in the near future."

The yen has dropped 25 percent against the dollar in just over a year as Japanese Prime Minister Shinzo Abe worked to weaken the currency. The falling yen shows that currency traders are betting on the end of the Fed's QE and rising Treasury yields.

Japan's actions under Abe show how central bankers are competing to find who can weaken their currencies the most, Pento asserts. The Fed, for its part, has kept rates close to zero percent and used QE to monetize $3.3 trillion of debt over the last five years.

"Global central banks will soon learn a painful lesson that for every action there is an equal and opposite reaction," Pento warns. "The Fed's unilateral unwinding of QE — in the nation that owns the world's reserve currency — is an addiction extremely difficult to overcome."

Emerging-market nations may increase their interest rates to stabilize their currencies. Turkey's central bank raised its benchmark rate from 7.75 percent to 12 percent this week, far more than expected. But it's not yet clear how effective the move will be.

"It takes Turkey in the right direction, but this could be grotesquely painful for the domestic economy. The chance of a run on Turkey is significantly lower, but it is still possible," Paul McNamara, an emerging-market debt portfolio manager at GAM, told The Wall Street Journal.

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Fasten your seat belts for more financial turmoil and currency chaos this year, advises a fund manager who correctly predicted the recent emerging-markets plunge.
michael pento,federal reserve,global,currency
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2014-08-29
Wednesday, 29 January 2014 11:08 AM
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