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Thoughts from the Trading Trenches

15 Years ago | October 01, 2014 12/11/23, 12:00 AM

In the October Issue

  • Currency Wars: Open Warfare
  • Forex Trading Outlook for October (video update)

Currency Wars: Open Warfare

The currency wars have heated up and it is now each central bank for itself. My article in our July newsletter, Who Wins? Race to the Bottom or Race to the Top and proved to be prophetic as we are in the middle of a currency war.

Currency Wars

The Reserve Bank of Australia has been talking its currency down all year and the market is starting to listen as commodity currencies in general have come under selling pressure. The Reserve Bank of New Zealand has likewise been talking down its currency to offset recent interest rate increases and backed it up in August by intervening (i.e. selling NZDUSD). Japan has toned down its currency rhetoric but I am sure it is pleased with a weaker JPY as long as it is an orderly decline. The ECB, meanwhile, has jumped in with both feet, not only talking the EUR lower but backing it up with an aggressive easing of monetary policy. In the near 16 years since the EURUSD was launched, this is the first time I can remember an open policy to weaken the common currency. Emerging markets have been key participants in currency wars for as long as I can remember, buying USD vs. their currencies to keep or slow them from appreciating and then converting a portion of the proceeds into other currencies, such as the EUR.

The USD, meanwhile, has been a key beneficiary, helped by an outperforming economy, an end to bond tapering and a market looking ahead to when, not if the Fed starts to raise interest rates. Up until recently, the US has pursued a covert currency war policy, stating in public that it supports a strong currency but more than happy in private to see its currency trade lower. The Fed has played its part via QE, which helped keep the USD weak.

Open Warfare

The picture has now changed. It is not only emerging markets but others entering the currency wars. It is not covert, like what Japan has done for many years using surrogates to buy USDJPY. This is open warfare. It is a race to the bottom. The USD and GBP are non-participants and unable to do battle (some say you need two sides for a war) as divergent monetary policy outlooks in these countries argue for stronger, not weaker currencies. This pits the central banks vs. the market as they try to engineer their currencies lower.

So there is no reason to fight central banks when currency wars are being supported not only by domestic policies but by diverging economies in the US and UK (i.e. fundamentals). This suggests that economic data in the US and UK will be a focus going forwards as they will guide interest rate expectations and that is what will drive the forex market.   The other focus will be on the ECB as it holds out the risk of QE but a step it is probably reluctant to take unless its sees no other option. The risk of QE should remain a weight on the EUR in what should remain a data dependent market.

Scroll below for my October Trading Outlook.

Jay Meisler, founder

Global Traders Association

Forex Trading Outlook for October

The next fews days could be critical in setting the trading tone for the month of October. See below for my video outlook in a market that has an even firmer dollar on its radar.

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