18th September 2014 by The Harried House Hunter
Today is of course the day that Scotland decides whether it wants independence and the opportunity to have (one day) its own currency. Although for the moment its government seems set on an unchanged currency at least initially as it intends to continue to use the UK Pound. However as it does so we have seen signs of what have been called the “currency wars” flaring up again overnight.
The US Federal Reserve
The US central bank triggered much of the moves with its policy announcement last night which continued its policy of “tapering” or reducing its Quantitative Easing purchases of debt. As of next month it’s purchases will be some US $10 billion per month lower and it will be buying US $5 billion of mortgage-backed securities and US $10 billion of Treasury Bonds per month. As you can see it will not be long before it is over as a policy and the next policy meeting is a likely date. However some care if needed as whilst the flow of purchases is drying up the scale or stock of them is increasing as the balance sheet of the US Federal Reserve has risen to US $4.42 trillion now.
The issue over a prospective interest-rate rise has got tied up over defining what the phrase “considerable time” actually means. If you have seen it being debated that is why. This time around Janet Yellen did not repeat her past mistake of actually giving a timespan so it is left hanging in the air. Interest-rate rises are expected for 2015 but of course reality can disappoint!
The US Dollar
This has recently been following the theories of conventional economics recently. The latter phase of its reductions in the rate of stimulus have been accompanied by a rise in the value of the US Dollar on the foreign exchanges. This was reinforced by the market reaction last night as the US Dollar surged.
If we look back the stronger dollar phase began as July opened and it moved through the 80 level on the US Dollar Index. At one point this morning it had risen to 84.7 and it is now at 84.5. So a rise of just over 6% in just under 3 months is what we have seen. As the US Dollar is the world’s reserve currency some of the impact of this is transferred abroad as for example other countries have to pay more for commodities such as oil which are generally priced in US Dollar terms. Buying US goods will be more expensive and for US importers buying foreign goods will be cheaper. As the US runs a substantial trade deficit already we wait to see what impact this has although in the short-term the reverse J-Curve may even improve the deficit slightly.
The UK Pound £
The speculation recently has been about a possible sterling crisis and of course there may well be some excitement in currency markets overnight should Scotland vote Yes. However somewhat typicially the media have missed the strength of the UK Pound against currencies other than the US Dollar. After a drop or two we have rebounded against the Euro to 1.265 which is about as high as we have been in recent years. We have blasted higher to break ground not seen for many years against the Japanese Yen as we reach the giddy heights of 177 Yen being required to purchase a single UK Pound! This is the highest we have been since the 2007/08 depreciation of the UK Pound.
So actually on the day of the independence vote the UK Pound is doing rather well, although of course later the “all bets are off” cry from the film Snatch may be deployed.
The Japanese Yen
Overnight the image of catching the Japanese Yen is the equivalent of trying to catch a falling piano. I discussed a while back the significance of the 101.4 level for technical analysts and now we find that it takes 108.7 Japanese Yen to buy a single US Dollar. So we know which way it broke! It is not only the UK Pound breaking relatively new ground against the Yen.
If we look at the theory we see that the expansionary policy of the Bank of Japan is meeting the reduced expansionism of the US Federal Reserve so a tick in the box for current events. Also hints of future US interest-rate rises are being compared to this.
Japan’s one-year bill yield extended its decline below zero percent and set a record low………The yield dropped to minus 0.006 percent today, Japan Bond Trading Co. said. It was negative 0.005 percent yesterday.
Now whilst you need a microscope to detect the amount it is significant that the Bank of Japan is operating at negative interest-rates and yields. Previously it has resisted this and we wait to see how far it may now be willing to go in this direction.
However news overnight was not entirely positive to say the least for this experiment. Japan continues to struggle with its trade deficit according to the August data with no real sign of exports responding to the Yen’s fall. Also the Governor of the Bank of Japan was warned that inflation has costs rather than being a magic solution to Japan’s problems. From Bloomberg.
Business leaders in Western Japan warned central bank chief Haruhiko Kuroda that the yen’s slide to a six-year low is boosting costs of imported raw materials and fuel and may spell trouble for the economy.
Companies in the industrial city of Osaka report that their profit margins are deteriorating as they can’t pass along the higher costs even as sales rise,
This has been steadily depreciating recently as the European Central Bank deploys all sorts of easing efforts such as negative interest-rates and various other cunning plans. Today’s cunning plan which is the first TLTRO seems to have been something of a damp squib as only 82.6 billion Euros were allocated. It speaks for itself if the banking system can tunr down funds being offered at only 0.15%. It also is a sign of the times that 82.6 billion can be accompanied by the word “only”.
However the Euro has fallen against the strong US Dollar to the 1.29 area and indeed below overnight. The ECB will welcome this on two counts. Firstly it is currently rather keen on seeing some inflation in the Euro area and secondly it will be hoping for an economic boost. On a more minor scale it will be happy that the Euro remains relatively weak versus the UK Pound.
However we have a genuine currency wars clash when we move onto considering the moves of the Euro versus the Japanese Yen. For a while the Euro was falling but the latest plummet from the Yen has taken it back to the 140 level. What do they say at boxing matches? Ah yes, seconds out……..
The magic of 18
There are two possible issues here either 18 is a magic number or whoever bought the boardroom table for the ECB was not a fan of future possible expansion. Whatever the reason there are consequences as for example Spain will not be voting in January. However minds are already mulling this bit (h/t @econhedge ).
ECB SAYS BUNDESBANK CHIEF WEIDMANN TO SIT OUT MAY & OCTOBER 2015 MEETINGS; AND MARCH, AUGUST 2016 MEETINGS
What could go wrong?
Never say that the European Union does not help us!
From today’s UK retail sales report.
Feedback from retailers suggested that sales were increased as consumers sought to buy high powered vacuum cleaners before the EU energy saving regulation came into force at the end of August.
There is much to consider in the recent currency moves and for brevity I have missed out today’s announcement by the Swiss National Bank. Along this road you may note something I have long both predicted and feared which is the spread of negative interest-rates. It will be a difficult environment for all especially a new currency which may well be part of the reason that Scotland wishes to remain in the relative comfort blanket of the UK Pound.
As we await news today I have some songs for you for #Indyref day and some suggestions have been sent already on Twitter.
When Will I See You Again? By The Three Degrees
Should I Stay Or Should I Go? By The Clash
Don’t Leave Me This Way by Thelma Houston (and also by The Communards)
Also here is a song for whatever the result may be…
We Can Work It Out by The Beatles
For a No vote
Better The Devil You Know by Kylie Minogue
If you leave me now by Chicago
Breaking Up Is Hard To Do by Neil Sedaka
For a Yes vote
Set You Free by N-Trance
Never Going Back Again by Fleetwood Mac
Freedom by George Michael
For a tight vote
Borderline by Madonna
Other suggestions are welcome.