Currency wars are upon us.
Jim Rickards in his book “Currency Wars” explains the current state of affairs. As sovereign debt levels explode in the foolish attempt to spur growth, the only tool left in the central banks hand is to devalue its currency, to stave off recession.
This leads to the phenomenon of “Beggar Thy Neighbors,” which I have spoken about prior.
Greece, Italy and Spain do not have this tool, but certainly could use it.
As the ECB begins its EQE (European Quantitative Easing) we see the euro at $1.13 where 6 months ago it was $1.28. The Japanese yen values continues to drive US equity prices, as it is the carry-trade darling. Borrow in yen to buy US stocks is the cheapest trade until it’s not.
Wednesday’s 185 point cratering on the Dow is a prime example of an unwinding of the trade off of the Fed’s continuing “patience” stance.
And while stocks fluctuate wildly in this environment, sovereign bond yields stay artificially low, since the adults in the room (bond traders) understand the global recession we are currently in.
This currency war will keep Yellen and company from doing anything with rates for 2015. ZIRP (zero interest rate policy) will be with us for the entire year and probably longer.