The dollar will fall, and the yen will strengthen in 2016. The Fed could not continue to raise rates, and the strong yen will be back again as the Bank of Japan’s monetary expansion is now limited.
There might be a number of investors who still bet on the yen’s fall due to Abenomics, but we recommend to reconsider. We even recommend to buy the currencies under quantitative easing, such as the yen or the euro. Here are the reasons.
The easy market for investors supported by the Fed’s quantitative easing is already over, and now the question is merely when, not if, the asset bubble bursts in several markets. The assets in a bubble are stocks, bonds and the dollar.
The Fed has ended its QE programme and is now in a process of raising interest rates. Will the US stock market be okay? It can never be okay as the central bank has injected trillions of money and is now going to retrieve it, but the market is manifesting groundless optimism.
The greatest premise investors believe in is the strong US economy and thus the strong dollar. However, the time is near for the uptrend of the dollar to be fading out. Why, how, and when? We will explain it in this article.
On the third of November, 2015, the ECB (European Central Bank) decided to cut interest rates and to extend its quantitative easing. Whilst we interpreted the market’s reaction in the following article, in this article we analyze how the increasing monetary base affects EUR/USD in a long term.
In this meeting, the deposit rate was lowered from -0.20% to -0.30%, and the QE programme was extended from September 2016 to March 2017. Thus, we first look into how the monetary base changes by the end of March 2017.
On the 3rd of December, the ECB (European Central Bank) decided to cut interest rates and extend its quantitative easing. The deposit rate was lowered from -0.20% to -0.30%, and it was declared that the central bank would maintain the QE until March of 2017, postponed from September of 2016.
As Dr Mario Dragi, the governor of the ECB, had suggested further easing in advance, some investors were expecting the expansion of the QE, which was not decided this time. Consequently, EUR/USD sharply rebounded.
After much ado, Greece reached an agreement with the Troika of creditors, and investors seem to be convinced that the crisis is over, as the yield of 10-year Greek government bond, which was largely sold before the agreement, went down to 8% from 19%.
Is the Greek debt crisis really over? Is the Greek economy going to recover? Unfortunately, you would know it will not as long as it is in the euro zone, if you are familiar with economics. Germans do not want to admit it. Greeks do not want to believe it.
Continue reading The fatal flaw of the euro zone: how Germany is increasing the Greek debt
After the stock plunge in August, the global stock markets rebounded once, and they are now confirming their second bottom. The stock market plunge was essentially caused by the lack of the driving force for the global economies, proven by the Chinese slowdown, and it will continue until the authorities take any action, namely further monetary easing or financial stimulus.
However, if S&P 500 goes down by more than 20% from the peak, there would be a possibility that the central banks would rescue the financial markets. As we have been bearish about the stocks before August, we are also responsible to explain the future of this bear market.
Continue reading S&P 500 could go down by 30% in 2015 to urge central banks to ease further
After the radical plunge in the global stock markets in August, the stock prices rebounded once and are seeking its direction after this turmoil.
Investors are carefully watching what the central banks will do. Some of them first even expected the Fed might restart the QE, but after the Fed policymakers revealed to remain seeking a rate hike, this kind of subjective hopes disappeared. We already explained why they would remain hawkish:
Continue reading Why 2015 resembles 1987 before Black Monday: central banks and rate hikes
Recently, the Fed seems quite hawkish and rushing to raise the interest rate. According to Reuters, Mr Lockhart, Atlanta Fed President, insisted the point of “lift off” is close.
Although the GDP growth remains to be over 2%, the speed of the growth is weakened, and the CPI is still far from their inflation target of 2%.
This means there are other reasons for the rate hike than just the economic recovery of the country. The Fed is actually getting pushed to raise the interest rate by some other fear: the reverse flow of the portfolio rebalancing.
Continue reading Why the Fed is so hawkish and rushing to raise the interest rate
The investors are trying to be prepared for the Fed’s raising the interest rate in late 2015 and 2016, worried about how much it could affect the markets, but they seem to have forgotten what has been supported the markets for several years.
Have we already overcome the termination of the Feds’ QE? The answer is no. Although the interest rates are kept relatively low, and the US stocks remain near the all-time high, the markets are just supported by QEs by Bank of Japan and European Central Bank.
The portfolios of the investors of all kinds have been distorted by the QEs. According to the paper by the Fed, due to the QE the owners of Treasury securities and MBS shifted their funds into riskier assets. For example, the households sold Treasury bonds and MBS to the Fed and bought riskier assets such as corporate bonds, commercial paper and municipal debt and bonds.
Continue reading Fed rate hikes will reverse portfolio rebalancing and end QE bubbles
On 5th, the ECB (European Central Bank) had a council meeting and set the deposit facility interest rate to be negative. After the announcement, EUR/USD fell to 1.356, and as the press conference started, the rate became 1.3503, but the euro was bought afterwards and now it’s traded at around 1.366, which is higher than the rate before the meeting.
The most significant decision in the meeting is the €400 billion TLTRO (Targeted Long-term Refinancing Operation), which will expand the monetary base by about 34%. Continue reading ECB expands the monetary base with negative rate and LTRO
