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Currency Wars: Don't Fight the Central Banks

12 Years ago | November 04, 2014 10/1/22, 12:00 AM

This is my third article on this topic and I am posting it to emphasize the importance of not fighting central banks in the current environment. Any way you look at it we are in extraordinary times that would have classic economists rolling in their graves at the sight of central banks ramping up the printing press. I was an economics major in college and I would have been tossed out of class if I suggested printing money would become mainstream monetary policy. The latest central bank to jump in with both feet is the Bank of Japan, which sent a clear signal to sell the JPY.


The following is an extract from a bank report written by a highly respected trader;

Feels like we are reverting to the good old days when central banks all did their own thing and got bang for the buck out of the surprise moves. Also feels, with the BoJ’s move last week, like we are in trapped in years of money printing ahead. They seem to recognize that as weak currency will have to be one of the tools employed to import inflation.

What caught my attention is the last line as I have been saying since the start of the year that given the lack of inflation, a weaker currency was a logical policy tool for economic stimulus, especially in places like the Euro zone where there are budget restraints. Well, this time it is the Bank of Japan that has taken the lead in what some refer to as an undeclared currency war. They may deny exchange rates are not a policy tool but make no mistake about it, this is clearly a goal of policy in places like Japan, the EZ and the latest to join in, Sweden. A weaker currency is both a source of stimulus where there is no other place to get it and a way to import inflation in a deflationary environment.

Bottom line, a good lesson to be learned is not to fight the central banks in the current world of global trading, especially when policy actions back up the rhetoric as currency trends tend to be strongest when economies/monetary policies of the major countries diverge. With that said,  the forex market rarely moves in a straight line so keep that in mind when trading even though the risks in the current market are clear.

Related GTA articles worth reading:

Don’t Fight the Central Bankshttp://www.tradersadvocate.com/member_contents/index/252#.VFeWTpV0xLM

Revisited: Don’t Fight the Central Banks http://www.tradersadvocate.com/member_contents/index/294

Ignore Central Banks at Your Peril

http://www.tradersadvocate.com/member_contents/index/337#.VFeWeJV0xLM

Jay Meisler, founder

Global Traders Association

 

 

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