Since the week of QE to Infinity by the major central banks back in mid-September wherein the Federal Reserve and the E.C.B. led the charge by announcing unlimited-in-duration bond and securities buying programs there has been a lot of movement in the currency markets. But, relative to the period between March and July of this year, however, where we saw 20+% moves in some of the BRICS currencies, like the Indian Rupee (which has still not recovered much of what it lost versus the U.S. Dollar ), the moves in a number of currencies have been muted but no less significant.
The reason for the major QE announcements was to calm the fear of the markets and settle the world's traders down before the upcoming political events in places like the U.S. and China. So, while E.C.B. President Mario Draghi announced the OMT and its unlimited in both time and scope bond-buying program nothing has actually been done because Spain steadfastly refuses to ask for a bailout and agree to the E.C.B.'s terms for so-called austerity. This blunted the rally in the Euro at $1.31, which has traded in a band between $1.29 and $1.31 for the past month.
The long-term effect of this form of QE, regardless of whether one believes it is the right course of action or not, will be to ensure a period of stagflationary non-growth on the U.S. and much of the E.U., those parts that are not already experiencing a full-on depression like Greece and Spain. While the technical definition of a depression is 10% GDP contraction, in a period of global unlimited money printing and GDP being denominated in those very same currencies, it is almost impossible to ever create a technical depression. But, manipulating definitions, economic statistics and the money supply do not paper over that any economy sporting 25+% unemployment in any demographic can't be considered to be 'growing' healthily. Sophistry is not an economic plan.
From an Asian perspective, which is the one area of the world that is still projected to grow at a healthy pace in 2013, it makes sense to look at the central banks' responses to the events unfolding in the west and see what is happening. The central banks of Singapore, Malaysia, and Indonesia made no changes to their monetary policies. The Bank of Thailand dropped interest rates from 3% to 2.75% at their October meeting and the Philippines did the same earlier this week. So, for most of the ASEAN-5 countries, their already strong positions as potential carry trade investments - with the exception of Singapore who pegs their interest rates to that of the Federal Reserve - only strengthened.
I compiled the changes to the exchange rates for all of these currencies along with the Chinese Yuan, the Japanese Yen (FXY) and Gold (GLD) versus both the U.S. Dollar (UUP) and the Euro to highlight what has happened since the E.C.B.'s announcement on September 6th. Any date in that time frame between the Draghi announcement on Sept. 5th and the Ben Bernanke's announcement on Sept. 13th would have worked for this broad analysis.
For many of the major SE Asian currencies, the trend is very clear. The Euro rally ended at the end of September and since then there has been a lot of consolidation activity. The net effect is that the Euro has been essentially flat versus its Asian trading partners for the past 2 months; volatile but ultimately without direction. This situation will give way once the E.C.B. uses that QE cannon it has primed but at this point, it has not happened and the markets have responded with relative calm.
On the other hand, the slide in the U.S. Dollar versus these currencies started when the Euro (FXE) bottomed back on July 23rd and has not let up since. This indicates quite clearly that no matter how much fear there is in the system, the Asian currencies, as long as their central banks hold their positions will outperform not only the dollar but the major trading currencies in the region, namely the Yuan and the Yen.
It is clear to see that even in the face of major stimulus announcements by China - $156 billion in infrastructure spending and a $356 billion reverse repo swap - the Yuan is climbing relentlessly versus the U.S. Dollar as demand for it rises regionally. The effects of the 30+ bilateral trade agreements that China has signed in the past year or so are beginning to have real effects in the market. What this means is that the Fed has made good on its promise to pump U.S. Dollars into the system thus exporting this inflation around the world. That it has not shown up in the commodity and Gold markets should not be a concern at this point. Those markets, especially oil and major food crops, are too important politically to be allowed to rise to far too fast before any important political event like a presidential election.
It is also obvious that the Bank of Japan is intervening in the Yen market as there is little reason for the Yen to be so weak versus the U.S.Dollar at this point unless the BoJ is printing faster than the Fed is, which, from the looks of things is what is happening. This change in policy for Japan likely occurred after the extreme response from China over the Senkaku/Diaoyu island dispute which has forced the BoJ's hand to keep their economy from cratering. All the work of putting Chinese/Japanese trade relations on strong footing looks to have been undone over a few uninhabited islands in the East China Sea.
As I said at the outset, the purpose of QE is to create stability and stability can be created by interventions into specific markets. It has been well-known for more than a generation that the U.S. Treasury and the Fed intervene in the equity markets, their very presence is a form of market manipulation, so it stands to reason that if there is a need to create a market perception that it will be done. Hence, to deny the idea that Gold and Oil are not being managed in price is to deny a major force within markets, the political force. In modern mixed economies the political is a factor to be considered at all times.
The bottom line is that while the markets look calm now they are also extremely fragile. If that wasn't the case then some new form of QE - interest rate drop, stimulus program, bailout, swap line usage, bond buying etc. - wouldn't be needed to be done by someone on practically a weekly basis. The SE Asian currencies are vulnerable to a short-term shock like what happened earlier in the year, but their fundamentals and growing economic integration is creating strength for their currencies and economies that did not exist even 4 years ago when Lehman Bros. fell.