Tuesday October 19, 2021 - 13:07:19 GMT
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[Forex View] A Case for Strong Currencies
During times of low inflation, there is little downside to having a weak currency. Some call it a race to the bottom. Others refer to it as currency wars. It is like a beggar thy neighbor fx policy as there are few consequences to pursuing a weak currency policy.
Whatever the case, during periods of low inflation, importers are not in a position to pass on higher import costs due to a weak currency. They tend to be more interested in maintaining market share than passing on higher import prices. Exporters, meanwhile, tend to benefit from a weaker currency as it makes their goods more competitive. .
This is why I said there is little downside to a weaker currency in times of low inflation as it has little impact on prices while acting as a stimulus for the economy.
On the other hand, during periods of higher inflation, there is a downside to having a weak currency.
A depreciating currency increases the cost of imports, thus putting upward pressure on domestic prices as the higher cost of imported goods is passed on to consumers. This applies to commodities as well, especially energy (I.e. and natural gas) as higher prices are passed directly to consumers. This, in turn, may add to upward pressure on wages as workers demand more money to offset the higher cost of living. This then runs the risk of a central bank response by tightening monetary policy to slow the economy to cool off inflation.
We have been in a period of low inflation for so long that little attention has been paid to the negative effects of a weaker currency.
Well, times have changed where a weaker currency now runs the risk of exacerbating inflationary pressures. [Trade to Win] How to Become a Consistent Trader.
So, if I was in the shoes of a central banker. I would be paying increased attention to fx movements as a depreciating currency would make my job harder by adding pressure on already rising inflation.
This changing environment suggests “official “resistance, (stealth?), to any sharp currency moves to the downside, at least to slow momentum from building too fast. In any case, this is what I would do.
But as a trader, I don’t have to worry about such matters. You only have to keep in mind that official sources would be more concerned with a weaker rather than stronger currency. I can only speak for myself but this is the best way to get in sync by identifying the patterns that are driving the forex and other markets as well.
The Amazing Trader and/or the AT Trading Study Guide
Jay Meisler, co-founder, Global-View.com
[email protected]
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