Be Patient, Because When This Trade Unwinds…
Looking Backwards, Going Forward
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Fed can remain
patient for a considerable period of time -
New Zealand raises
its rates, while Norway cuts rates: What’s up with this and what does
it portend? - Last week was nothing for currencies,
waiting for the G-7 meeting in Boca Raton, Florida and what currency
markets can expect.
It is as if Alice in Wonderland has
taken charge of the Federal Reserve. The slightest change in
words can destroy billions of dollars in financial assets. Every
FOMC release must be vetted with a dictionary and thesaurus at hand.
Soon E.B. White will be a guest on CNBC. Anyway, the Fed
statement that roiled the markets must be analyzed in a larger
context. It has taken the Fed out of the box it had put itself
in by turning time into an irrelevant factor. The Fed can feel
free to move whenever it feels impatient about the robustness of the
economy. Greenie and company no longer have to explain away the
meaning of “considerable” and be flexible as to setting rates.
The economic data is strong on every component but employment and with
this being an election year; they will err on the side of caution as
to raising rates. The biggest problem for the Fed is that the
most important indicator of inflation rates is the long end of the
yield curve. When market participants anticipate inflation, they
sell ten year notes, thus providing the market with a long-term market
view. Asian central banks have rendered this indicator useless
in the short term by their continued purchases of five and ten year
notes. When this trade begins to unwind, it will wreck havoc in
the global debt markets. All you have to do is be patient!
In global currency markets, the two most interesting events took
place in two very disparate locales. The Norwegian Central Bank
continued on its drive for inflation by lowering its interest rate to
2% while the New Zealanders raised rates by 25 basis points to 5.25%.
The action by the Kiwis to raise rates indicates that the global
economy is out of sync as the economies of Asia are robust and Europe
is experiencing a tepid recovery. Retail sales out of Germany
were very weak and unemployment in France rose to 9.7% – the twin
engines of European growth are sputtering. It was interesting
that the Kiwi currency almost closed lower on the week even with the
rate rise but saved itself in late Friday action. The Aussie dollar
did close lower on the week as short term investment shifted to New
Zealand. With credit growth very robust in both Australia and
New Zealand, it will be interesting to see what the Aussies do this
week in regards to rates — if the Aussie Central Bank stays unchanged,
the Australian dollar will probably head lower as it is ready for some
consolidation after its massive appreciation. The Norwegian
move, however, signals that growth in Europe is still suspect and that
more monetary ease is needed.
Next weekend brings us the G-7 meeting and its importance to global
policy setting. In September, the emphasis was on currency
stability with the major economic nations voicing their concern about
Asian central currency intervention (read Chinese and Japanese).
The Europeans were extremely upset that the Euro-currency was taking
the brunt of appreciation because of intervention by the Asians.
For a few days, the Yen appreciated against the Euro but that movement
was short-lived and the Euro took center stage again as the Asian
central banks restarted their intervention strategies. The
Euro/Yen cross rate is now considerably higher than it was immediately
following the September meeting so the Europeans are going to be even
unhappier than they were before. If the French and Germans wish
to have a weaker currency, they are going to have to twist the arm of
the “apolitical†ECB and have it cut interest rates now.
European economic growth is keeping global growth down and if they
want to rev the engines of growth, the time is now for interest rate
cuts. The U.S. and the rest of the world need for Europe to do its
part, otherwise the European currency will continue to strengthen
until the economies of the Euro currency really are in stress.
Without fiscal flexibility in Europe, because of the growth and
stability pact, the onus is on monetary policy. If the Europeans
want some help on the currency front, a cut in interest rates would
help their case. The solution seems so simple that, as a trader,
I have to wonder what they are thinking about; do they think that
stifled growth will result in the defeat of George W.? Hmmm.
Stay patient and focused,