Currency War Casualities

Jeez this is getting boring. Stocks go up on QE/stimulus hopes. Then, when stocks have the rare down day, it’s on concerns QE/stimulus will end. What a farce this all is. QE will never end. It can’t. Only the pace of its twisted and corrupt purchases will vary.

But a market hooked on the cracky odours of QE is no longer a rational beast…not that it has been in any way rational for many, many years now. So when the Federal Reserve’s Charles Plosser says he favours scaling back the pace of stimulus, the market sells off in a panic.

It’s pathetic really. An equity market is meant to be a predictor of the economy and business conditions 6 months hence. Now it’s a daily punt on the utterings of fools masquerading as wise men.

No wonder capital is edgy. No wonder it’s shifting to the core…the safety of global blue chips. This is a point Dan Denning has been talking about  for a while now. If the Fed’s starting to push everyone around, why not move where it’s a bit safer…if only in a relative sense?

The other point to note about the edgy nature of global capital is that when it shifts to the core, it has an effect on currency markets too. If global blue chips are the core of the equity market…then the US dollar is the core of the financial system.

The Aussie dollar cracked overnight, falling nearly 2 cents against the greenback. It’s nearing parity once again. We think, in time, it will go right back through that level to where it belongs…somewhere around the 80 US cent level.

This will eventually be good for resources stocks, as it will restore some competitiveness to the sector. Dr Alex Cowie is bullish on the sector’s prospects given the beating it has taken recently. Click here to see what he likes.

Many people can’t understand why or how the US dollar could possibly be strong with the ‘Bernank’ monetising US$85 billion per month. The simple fact is that the US is at the core of the US financial system. When the system is healthy, money flows from the core to the periphery.

So a weak or weakening US dollar is bullish for the global economy…in that it’s a sign of robust conditions elsewhere in the world. For example, when the US runs large trade deficits, it sucks in goods and services from around the world and pays in IOU’s…usually in the form of US government bonds.

The dollar denominated bonds then become the ‘reserves’ of the country that sent the goods and services to the US. That country can then expand its domestic credit on top of these increased reserves…which then increases economic activity. So the US gets a free lunch and exporters get seemingly unlimited demand for their products.  It’s a sweet system.

But when it’s not working too well, the US dollar strengthens. Capital changes direction and goes from the periphery to the core. This happened in a heartbeat in the 2008 crisis…now, the process appears to be deceptively slow.

After all, global markets keep going up, masking the underlying fragilities of the financial system.

But the recent move back into the dollar suggests an underlying caution taking place. It accords nicely with Dan’s theory  that capital seeks a refuge in the ‘city-state’ stocks…companies with revenues larger than many nations’ GDP. To buy many of those stocks you must buy the US dollar first.

So as the US dollar centric system totters, paradoxically you’ll see the US dollar strengthen. All other currencies will fall by the wayside. We’ll look back in a few years’ time and laugh at the 2012 meme of the Aussie being a ‘reserve currency’.

The final bout will take place between the dollar and gold. Gold will win of course, but the dollar will put up a fight. It will go the 12 rounds.

One of the chief reasons for this continued flight into the US dollar is, we think, directly related to Japan. As you know, the Bank of Japan recently made an all-out assault against the yen. The Japanese currency is now considerably weaker against its major trading partners.

There is no doubt yen weakness was behind the Bank of Korea’s decision to cut interest rates yesterday by 25 basis points to 2.5%. Korea is a major competitor to Japan and is feeling the pinch of its currency moves.  Data released in April shows Korean export growth at just 0.4% year-on-year. Not good for a nation highly dependent on export growth.

The main front in the currency war has moved to Asia. Perhaps that’s why the Australian dollar fell so hard overnight. Currency and trade wars between our major commodity consumers do not bode well for the future.

And China is a major victim of the currency wars too. Owing to its loose peg to the US dollar, China to some extent imports US monetary policy. So the Fed’s $85 billion per month monetisation program causes inflationary problems there.

Yesterday, China reported slightly higher than expected inflation figures for April, with annual prices rises of 2.4%. This puts policymakers in a bit of a bind. As Reuters reports:

‘China’s annual consumer inflation accelerated more than expected in April while factory prices fell for a 14th consecutive month, highlighting the dilemma facing the central bank as it balances support for the economy against the threat of rising prices.’

The link to the dollar benefitted China for many years. It underwrote their industrialisation and urbanisation. But now it’s becoming a problem, which is why China is looking increasingly to liberalise its financial markets and allow capital to flow more freely.

But that won’t be an easy task. Freeing up the capital market too soon could cause the banking system to crash (captive savings of the Chinese household sector have underpinned the country’s historic credit boom). China will need to move very carefully.

And it will have to do this while dealing with a belligerent neighbour in Japan, who by devaluing the yen is trying to steal from anyone whatever dwindling demand is out there.

So as the US dollar moves above 100 yen for the first time in four years, any talk about the end of QE, or even scaling it back in anything beyond words, is just more Fed gibberish. Get ready for an escalation in the currency wars.

Greg Canavan
for Markets and Money

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From the Archives…

The US Federal Reserve: What a Humiliating Failure!
3-05-13 – Bill Bonner

The End of the Road
2-05-13 – Bill Bonner

Why Apple’s Advantage is Gone
1-05-13 ­– Dan Denning

The Kamikaze Rally That Could Drive Stocks Higher
30-04-13 – Dan Denning

Australian Deficit: Where Did the Money Go?
29-04-13 – Dan Denning

Greg Canavan

Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing.

He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’.

Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors.

Greg Canavan

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17 Comments on "Currency War Casualities"

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Dollar – Trade – Reserves Martin Armstrong,, May 8, 2013: QUESTION: In your most recent post you mention dollar demand off setting Fed Printing. But fairly often we hear about new international trade agreements that have excluded the dollar. How does this figure into the equation of dollar demand? ANSWER: Trade agreements are actually irrelevant. That is separate and distinct from reserves and the huge amount of dollar loans. Regardless of whatever you agree to make payments in, you still have to park money in reserves that are (1) liquid and (2) paying interest. That right now is becoming… Read more »
slewie the pi-rat

EVERYONE m.u.s.t. keep the checks in the mail!

can you tell me ANOTHER reason that the Aussie GOOBERMINT hasn’t made gold and silver coinage legal tender for PEOPLE?

of course not!

it’s the Queen, styooopid!

I’m a bit thick, so lets get this right. A country, lets say Germany, sells its ‘stuff’ to the US of A and gets paid in ‘IOU’s, ie treasuries. Germany then gets fed up of selling its ‘stuff’ for nothing and decides to get back its gold, that the US of A has been playing with. Then Helicopter Ben says NO, you’l have to wait till we print more IOU’s and get some idiot, lets say Germany, to ‘sell’ us some more stuff so we can give treasuries in return,,lets stop right there. My head is starting to spin. Can… Read more »
slewie the pi-rat

here is the bernakster, today, explaining everything!

slewie the pi-rat
he finally ezplains dodd/frank! i always like the benzelbub b/c he had a tough job and only 54K hired help (non-shadow). it’s like they got the pitcher and 1/2 the team knock out in 6th inning, and put the poor bastard in when the score was 29-0. oddly (?), i’ve tried to finish this several times and was just in wonderland at the chairSatan’s choice of words! i actually threw up, i was laughing so hard. but he’s a Princeton Tiggrrr, and this tells me is gonna stay the course; with prez0, and john Kerry. i note with some aplomb… Read more »
Lachlan Scanlan

till they just wanted to kill me

zero hedgehogs rejected you ?

that’s not very nice


“China to some extent imports US monetary policy.” …. Greg’s now caught up with the game. They have been takers rather than makers the whole way through since Nixon discretely flew Kissinger in there from the secret air base in Pakistan.

I think Slewie just told us that there is nothing but continuity of government in the big plan. Agree with him on the Bernankster, they bought his screwy plan off the rack, it could have come from any useful idiot at Princeton or Harvard or wherever. The man for the ages? No, but for the period or the quarter in flabby american sportster speak anyway …. we do note however that Slewie’s empathy is washing the page a smite clean. For watcher, what would Armstrong make of Glenn Stephens reserve swap with China? It wasn’t on his horizon when he… Read more »
Lachlan Scanlan
“China to some extent imports US monetary policy.” Any thoughts on the SDR’s Ross? I’m curious to see how China will continue to respond as we go forward. DRA discussed them here about 4-5 years ago if I remember right. Here is a quote from Wikipaedia (bancor) “In a speech delivered in March 2009 entitled Reform the International Monetary System, Zhou Xiaochuan, the governor of the People’s Bank of China called Keynes’s bancor approach “farsighted” and proposed the adoption of International Monetary Fund (IMF) special drawing rights (SDRs) as a global reserve currency as a response to the financial crisis… Read more »
Lachlan, some time ago I would have signed onto the SDR as global currency idea, not any more. When you see a return to prominence of offsets agreements and barter and all that jazz you will know that the days of washing machine sterilisation through a 3rd currency liquidity are gone. The USD made it all too easy and the SDR wouldn’t in the end be any more apolitical than the banking clearing house system. In fact it would probably be abused from the outset for locking in means of sanction. Speaking of which, demonised Mugabe makes a comeback… Read more »
slewie the pi-rat
hey, Latch! they killed me… …for trying to speak the truth to the publisher? right in the open, like that? i have also been working thru The Tripoli Post with The LIBYAN Revolution. introducing, as here, the political values of the Enlightenment and THEIR Lady Liberty. elsewhere, we have tangled with the stark differences in approach between SELF-GOVERNANCE and “humanism” which has become, essentially, international fascism, especially through the UN and the “everybody knows this is best” projectile vomitorious spew-launch of collectivist evolution-airy “thinking”. just the logical stuff they MUST be considering, as Libyans. as people. some of… Read more »
That seems to be the way it’s headed. They will possibly try something (maybe of little consequence) out with it anyhow according to some insiders but the SDR itself has been sitting around doing nothing of great note for many decades. But there are yearnings for a better world which never go away. You know in truth I am not concerned with what people anywhere want so much. It’s two things *why people want a thing? (is it sensible or just avoiding reality) *how they go about getting a thing…(how it affects them and other people)? that determine my response… Read more »
slewie the pi-rat
LO^OK! from: Gunmen in Libya Lift Ministries Siege 12/05/2013 02:13:00 Libyan militiamen besieging the foreign and justice ministries in Tripoli have now withdrawn and handed control of the compounds back to the authorities, Justice Minister Salah al-Marghani said on Saturday. “Those who were at the two ministries have handed over the two ministries to a committee formed by the government and the General National Congress and have now departed,” Marghani told AFP. this is a very well-disciplined militia. and they are not divided. what they have agreed upon remains to be seen, but with about 10 pitchers throwing major league… Read more »
slewie the pi-rat

after i posted, i noted that in this last Tripoli media, these are no longer “gunmen” and “armed men”.

they are now: militiamen!

and we’ll get to see that UltraLite Governance develop, internationally.
the government of Libyan Lady Liberty will now dance with both sides and make some serious and archetypal “deals”.

“compromises”, we usta call them, ourselves, coming into 1789.



arrr…good to have you around Mr Slew. This geopolitical thing is a deep rabbit hole aint it. I keep an open mind on this stuff because war is always 99% lies, propaganda and deception. Sounds like market news actually ;)

Anyhow for for anyone interested

and today


Re: Bernanksters off the shelf plan.
I never took Keynes or his followers seriously either. These dime a dozen, academic lines are just brought through to give credibility to the status quo, is my hypothesis. Despite that I never get sick of Keynes vs Hayek


” hey, Latch!
they killed me…
…for trying to speak the truth to the publisher?
right in the open, like that?”

Not so surprised Mr Slew…well at anything/anyone. I don’t assume I know that much. How many people completely knows anyone elses agenda??? yet so many assume. Lets get religion then. Happy sailing bro.

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