Confronted by sluggish and uneven recovery trends worldwide, countries are left with no other option but to deplete their currency values for in order to remain in competition. Japan has already set the ball rolling by setting up the platform for a worldwide currency war. It has announced money creation and purchase of bonds as major moves. Analysts are expecting others to follow suit and ensuing a battle that would benefit the early ousters but could prove to be detrimental for the economic recovery and relatively strong stock markets.
These moves are slated to follow the three year long binge buying carried out by the Fed as part of its quantitative easing drive. The three rounds of easing have managed to maintain the tempo for the American economy. In an announcement made in the late 2012, Masaaki Shirakawa provided indications of aggressive easing totaling 50 trillion yen through 2013. The move was aimed at bailing the country out of its deflationary trap. It was felt that a decline in the value of Yen could help the exports ad exert northward pressure on the other currencies. This is something that was not likely to be tolerated well by competitors.
Since quantitative easing ensued in 2009, the significant expansion in the balance sheet of the Federal Reserve has resulted in a 11% decline of comparative dollar value. Simultaneously, the prices of stocks have appreciated by 100% and the index has registered gains close to 80%. In 2012, central banks across the globe have cut down on interest rates at least 75 times in a bid to create growth conducive conditions. However economists are of the opinion that growth would be sluggish around 3% this current year. However, those engaged in devaluation of currencies are of the opinion that it brings down goods prices and improves exports, thus creating some positive inflationary trends. However, the initial stages of inflation are considered to be bad for the fortunes of stocks and might motivate investors towards commodities and fixed income.
The S& P’s 500 registered a slip close to 4% in 1994, leading to significant loss of ground throughout the year as the Fed continued to tighten policies for recovery control. However, the index soared by as much as 32% over the next year following a significant bull run. Although the recent Fed minutes have instilled panic into some investors, the fears have largely been dismissed. And other central banks are also likely to take note.
Analysts believe that several nations either need or want weakened currencies, and in case China also feels the same way, then a risk negative war could emerge. This also means that the prices of gold could soar. However, it should also be taken into account that rising gold prices and depleting bond rates did cause a precipitation of the 1987 crash. Therefore, studying the Chinese Yuan and the Asian dollar index becomes crucial. Trends in New Zealand, Australia and South America are also to be inspected.
We believe that everyone deserves a properly developed strategy for financial safety.
Chief Market Analyst, ITM Trading