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Monday February 1, 2016 - 03:01:06 GMT -

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Currency Wars: Central Banks Running the Asylum

I have an undergraduate degree in economics plus an MBA in finance and when I went to school monetary policies conducted today by major central banks would have been considered heresy.  If I would have suggested that printing money and negative interest rates would become mainstream policies without igniting inflation I would have been thrown out of class and burned at the stake. Instead, this is the bizarro world we live in. It may be more symptomatic of desperate times or simply a case of governments ceding power to central banks to stimulate economies and avoid deflation rather than using traditional fiscal and tax policies.

Whatever the case, the Bank of Japan decision to join the negative interest rate party may be seen as part of the undeclared currency wars as the impact on the Japanese economy remains questionable. As John Bland pointed out on the Global-View Forex Forum,

I have been asking myself what has changed with the BOJ decision. Negative interest rates only apply to a narrow slice of bank deposits at the BOJ andas for the additional QE, the yield on the 10-yr JGB has fallen from 0.22% to 0.10%. None of us are banks and those who were investing at 0.22% are unlikely to be impacted by a 0.10% yield. The BOJ decision was all about headlines.

How else can you interpret it other than an attempt to weaken the JPY, which had been strengthening due to safe haven demand amid global growth concerns? Central banks will deny that FX is a policy tool but don’t believe them. Competitive devaluations in a world of low inflation is the easy way out but it is not without ramifications. It is not a sign of confidence in the future when rates turn negative out to 7 years.

I remember back in the 1970s when the Swiss National Bank imposed a penalty by imposing negative interest rates to discourage capital inflows and an excessive firming of the Swiss franc. This policy was one that came from strength rather than the current policies of negative interest rates, which are signs of economic weakness and desperation.

I took a double take when I saw this on the Global-View Forex Forum,

Mtl JP 09:44 GMT January 29, 2016
BOJ Eases: Reply   
Bernanke says Fed likely to add negative interest rates to recession-fighting tool kit
- MarketWatch

How can any responsible central bank include negative interest rates as a policy tool? My economics professors would turn over in their graves. Not only is it the opposite of everything I was taught but it punishes savers, forces investors into more risky investments in search for yield, creates bubbles and raises concerns over the health of respective economies. What concerns me most is that quantitative easing and negative interest rates have become mainstream monetary policy.

Given my background, I feel like I am the only sane one in an economic insane asylum but from a trading perspective this is the hand we are dealt. So for now, the JPY is back on the list of funding currencies but the test will come when/if the mood in equity markets turns back to risk off. 

Jay Meisler MB CTA



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