This should prove to be an interesting week. S&P's downgrade of U.S. debt Friday added further uncertainty to a market already bedeviled by an escalating debt crisis in Europe, an unexpected interest rate cut by the Swiss central bank, a unilateral intervention in the currency market by Tokyo, and a failed attempt by the Turkish central bank to stop the lira's rapid depreciation.
G7 finance ministers and central bank governors issued a joint statement Sunday promising coordinated action to head-off a global financial meltdown. Japan reiterated its confidence in U.S. government debt and the European Central Bank pledged to begin buying Italian and Spanish bonds in an effort to drive down "unsustainable" borrowing costs for those countries. Perhaps most importantly, G7 officials promised to closely monitor volatility in currency markets and indicated that appropriate steps would be taken to curb "disorderly movements in exchange rates."
With the financial crisis of 2008 still fresh in the minds of policy makers, we can be sure that no expense will be spared to avert another full-fledged crisis. Both Japan and Switzerland are export-driven economies and neither can afford to see its currency rapidly appreciate. Both Swiss and Japanese officials have indicated a willingness to take further steps to cool the franc and yen if necessary.
In Europe, the ECB has now pledged to purchase Irish, Portuguese, Italian and Spanish bonds indicating its willingness to do anything necessary to stave off a bond market collapse, even if it means violating the principles set forth in the EU's founding treaty.
In short, it could be very dangerous to assume that policy makers will continue to let confidence in markets erode. Continuing to bet on a rapid rise in the Swiss franc or the Japanese yen could expose investors to the very real risk of a sudden reversal of fortune should central bankers decide to intervene in foreign exchange markets. Also, staying short the euro is considerably risky when the ECB is committed to the imminent implementation of what amounts to the eurozone's version of quantitative easing.
My advice would be to park some cash in the SPDR Gold Trust (NYSEARCA:GLD) and the Currency Shares Canadian Dollar Trust (NYSEARCA:FXC) and try to find some good blue chip companies for bargain prices when the smoke clears.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.