One has to act on their own when no help from the Fed may be expected
The best self-defence is a self-attack. The central banks, competitors to the Fed, seem to have got the point of where Jerome Powell is pushing the USD to. Down. Who besides Washington will profit from it? If the economies of Eurozone, Britain, Japan, Australia, and some other well-developed countries felt “so so” amidst the US currency’s revaluation in 2018, what will happen to them if the USD starts growing weaker? There’s only one thing left - follow the trail beaten by the Fed. “You’ve started it all, we’ve joined in. You’re the first singer and we’re your choir”. It looks well on the outside, but when going to the bottom, it starts smacking of competitive devaluation.
In 2018, the central banks watched the Fed raising the rates and hoped sincerely that the devaluation of their currencies would help export to spread its wings. Alas! The fall of EUR/USD wasn’t enough. Trade wars and the related slowdown in the Chinese economy and foreign demand broke onto the scene. One had to count only on domestic resources, but Germany didn’t rise to the occasion. Its industry is having a hard time with a transfer to e-cars and tougher requirements for diesel and gasoline engines. In future, it can promise huge growth, though. But we are currently where we are.
“If you should need my help, I don’t know where you can find me”. One of Jerome Powell’s first statements in 2019 made everyone understand that no help should be expected from the Fed. The markets considered FOMC’s desire to idle on the roadside to be almost the end of the normalization of monetary policy and started buying out other currencies. They said, if the dollar was stripped of its trumps, where it could grow further? It didn’t work that way! Heavy artillery - the central banks - came into action. A bad example is catching. After the Fed, it was the Bank of Canada that voiced a desire to take a pause. It took off from there. The ECB hinted at the opportunity of developing stimulating measures through long term refinancing operations (LTRO). The Reserve Bank of Australia is ready to lower rates, if necessary, while the Bank of England looks frightening because of a disordered Brexit. They are all engaged if self-attacks: they say that local economies are pressed hard by worse external conditions. In fact, they are lying. The problem lies in competitive devaluation.
If you wish to get on well with people, let them lie. When Jerome Powell said the Fed could afford flexibility and patience because of inflation, he wasn’t fully sincere for sure. As early as 6 weeks ago, in December, it was obvious that they managed to tame inflation. The collapse of stock indexes and Trump’s criticism were another thing. Living under such conditions isn’t easy. However, life often creates such a fanciful design that frosted window images pale before it.
So, where should investors run to? The Fed and G10 central banks don’t get tired of self-punishment. The currencies of developing countries may become a magic wand! They say, the increasing global appetite for risk, low volatility and renowned interest in carry trade will breathe new life into them! The regulators themselves aren’t in a hurry to use verbal interventions. The Bank of Russia thinks that the USD will become impotent after reaching the level of 70.
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