The reported logic of Fed chief Bernanke by lowering short-term interest rates (and now long-term rates) is to force U.S. savers to seek yield by lending to businesses.
There are three major problems with that failed strategy:
- The intermediaries of credit (those who get people's savings to in turn lend them) are not lending as they should, due to (among other things) rising bad-loan provisioning concerns related to the mortgage sector.
- U.S. citizenry at large seems to be adopting a dual approach of reducing debt and saving much more than before, something that is not a minor change in long-term behavior
- The savings-seeking behavior caused by the financial crisis and magnified by the Fed monetary actions forces saving vehicles (pension funds, mutual funds, etc) to seek yield out of the U.S.
If you were a professional money manager charged with administering a few billion dollars, why wouldn’t you invest a bigger share of that money in emerging markets or Australia/NZ or the many "relatively safe" countries that are not driving their interest to zero?
If you were an insurance fund manager with billions of dollars in future obligations that had committed to paying fixed annuities around 5%, wouldn’t you put an even greater portion of your portfolio in liquid money markets overseas?
Well, that's what they are doing. And in the process the Fed's action is causing a stealth devaluation of the U.S. dollar. So not only do we have a QE2 policy that is perceived as dollar-weakening, because the Fed prints large vast sums of money to finance a huge fiscal deficit, but also we have a large net capital outflow from the U.S. because the rest of the world does not share our Keynesian monetary policy to the extend our Fed does.
Barbara Rockefeller, an analyst I rely on a lot to get the right context, sees a choppy and risky market in control of traders and speculators until we read the next FOMC statement. Barbara sees the market looking for clues if Bernanke might hold-off QE2 to give some of the initiatives that Treasury Secretary Geithner seems to be pursuing in global macro finance.
It seems as if Geithner is part of a good cop/bad cop routine. He is the good cop because he is asking other nations (i.e. China, Japan, Europe), to voluntarily and without any compulsory mechanisms, implement policy changes to establish limits of external trade balance at 4% (trade surplus or trade deficit). Or else. The bad cop in his argument is rumored to be that the Obama administration would go along a Congressional initiative to restrict trade from nations that have currency rates or policies that prevent U.S. goods to have a competitive position in those foreign markets.
Geithner further argues that the U.S. dollar is about right in the big picture relative to other major currencies and does not need to be weakened further. But if Geithner is the good cop and Obama/Congress the bad cop, what kind of cop is Bernanke? Not good, not bad, just his own cop. I picture Bernanke listening politely to Geithner and thinking:
“Kid, I liked you from the time you were at NY Fed. You know that I do. In fact, I support you 100% as the official spokesman on USD matters. . . But you've got to understand that I have my mandate, which is monetary stability and sound employment levels.”
The Fed and the U.S. Treasury are at odds. I don’t read (yet) a common approach with respect to macro policy on the U.S. dollar. After a long period without stating the official U.S. policy on currency markets, Geithner appears intent on defending the value of the USD. But those efforts, without the full support of the Fed and other central banks, spell lack of resolve and staying power.
When we remove the smoke caused by Geithner’s mention that the USD is at appropriate levels relative to the majors, we are left with a clever positioning of U.S. discourse. The Geithner recent pronouncements accomplish two main objectives: 1) The U.S. wants plausible deniability in front of EU policy makers if market forces “mysteriously” continue to weaken the USD. 2) The US wants to shift the currency devaluation discussion to show China as the main culprit.
Are the Europeans buying the Geithner proposal? Let’s quote Germany’s Finance Minister Rainer Bruederler, who is roughly Geithner’s counterpart in Europe: “There are elements in the U.S. proposal that remind us of planned economies (ouch)." Referring to the Fed Q2 announced policy, Bruederler adds: “It is the wrong approach to solve problems, in my opinion the excessive creation of money is an indirect manipulation of the currency rate (ouch, ouch)."
What does it all this mean? The currency wars continue on and appear to be intensifying, although not many officials will admit to it especially after a G20 meeting.
Whatever correction was/is happening within EUR/USD since mid Oct. is temporary. The only question is where does the selling stop, and we resume the upward trend that has been in place since Jun 2010.
Again Barbara Rockefeller wisely counsels her morning brief subscribers to tread lightly and avoid overexposure in a market that displays light bullish EUR/USD sentiment. To her afternoon report subscribers, she gives modest sell opportunities and appropriate levels to be prepared in case the bullish EUR/USD trend resumes in earnest.
As a special note, I would like to alert traders that VaraTrade has uploaded recorded footage from an educational seminar with Barbara Rockefeller last week – they are available at both Barbara’s profile page at VaraTrade.com and at our YouTube channel – see below.
Disclosure: no positions
