This page has been archived and commenting is disabled.
FX Intervention an Option? - Maybe
Coordinated currency intervention may not be far off. I am not making a
prognostication that this will happen. That is far to complex an issue
to make a ‘call’ on. I want to make a case that the conditions are
either presently with us or soon will be upon us for currency
intervention to become an option that is exercised.
In my opinion there were at least a half dozen times in the past 18
months where currency intervention could have been an option to provide
stability to a global financial system that was cracking up. But there
was no coordinated intervention in the FX market. There was an
unprecedented amount of fiscal and monetary actions taken by nearly
every country in the globe, but it never came down to FX intervention
as a policy option.
I bring up this history to re-enforce my point that intervention is
impossible to call and is, based on recent history, a remote
possibility. That said, should it come in the next few days and weeks
it would be a measure of just how much pressure is building up and how
unstable the system is.
Central bankers know they can’t control the value of their currencies.
The markets are far bigger than they are. They best the can do is slow
a process. A checklist for decision-making on coordinated intervention
would include some of the following:
- How quickly is the market moving? Is the rate of change orderly?
The movement in the $/Euro has not been disorderly. We have a
10% recent peak to trough move. That is big in currency land but it
would not by itself be a justification to intervene and provide
temporary stability.
A different way to measure how much stress there is out there is to
look at the Euro/CHF rate. The Swissy has strengthened by 3+% of late.
That may look like peanuts compared to the moves in the dollar. But it
is actually a big deal. The SNB has been intervening to hold the 1.51
parity to the Euro. They gave that up after a long fight. Now they just
look silly for having drawn a line in the sand then backing off. The
Swiss just hate what is going on.
If you want to look at stress look at the move in the $/Yen and the
Yen/Crosses today. The two big figure move might be considered
disorderly. I am sure that there are some Yen traders that are puking
in the garbage pail. The Japanese CB hates this. They don’t want a
strong Yen and they hate when it gets moving too fast
-What is the cause of the capital movements?
It’s the sovereign story that is driving this. This is a bizarre factor
that is driving the Euro/$ rate. The GDP of France and Germany are many
multiples of that of Greece. Think of this as if the state of Utah was
having a budget crisis. You wouldn’t dump the dollar just because of
that. Yes we have Portugal and Spain to consider (Italy, in my opinion
should be taken out of the PIGS). So go back to the US comparison and
you have Utah, Georgia and Connecticut to worry about. But step back a
bit, we are trashing the Euro based on this. The real comparison to the
US and the EU is not Georgia or Utah; it is California and New York.
The deficits and problems in these two states balance the problems in
Athens and Madrid on the currency scale.
There is nothing rational about our markets. But moving massive amount
of money around the globe because of problems in Greece is not
rational. I say, “Never fight the tape”. Central bankers can’t say
that. There is a good excuse for them to fight this tape.
-Is the rapid change in FX rates creating collateral damage?
Boy is it. Just look at the tape. This Greece story has gone global. It
is raining deflation on us. VIX on everything just shot up. A few more
weeks of this and you start taking points off of global GDP.
-What is the implication to the US?
The big Boss made a speech a week ago and said that we had to export
our way out of trouble and export to create jobs. Well you can kiss
that plan goodbye if the dollar keeps rising. You think this is good
for John Deere, Cat, IBM, Microsoft, Apple, Boeing, Cisco or Intel?
This is not good at all. It is one of the reasons the DOW is getting
smacked so hard. A strong dollar is a decidedly brown shoot. Go ask
Disney or Mike Bloomberg. How much do they make on foreign tourism? The
White House knows this. I doubt Geithner does but there are plenty of
others (Volker/Summers) who understand the implications of this.
Bernanke knows this. He has bet his career on something. It could get
derailed if the dollar gets too strong too fast. Everyone in D.C. hates
what is going on. They are looking for solutions. Intervention is the
one thing that is on the shelf.
-If left unchecked where could the instability lead?
This is a slippery slope we are on. The markets seem to have Greece in
their cross hairs. But this will pass and those with loaded rifles will
point elsewhere. This sovereign story could spread very quickly. It
could jump out of Europe and go to Mexico overnight. It could go to
Asia and make a mess of Indonesia, Philippines and Korea. Once it gets
started it will be very difficult to stop. It is already moving fast.
It could go global in a week. The worst possible outcome is that it
goes uphill to the “stronger” countries. Like France, Germany, UK and
of course the USA. If this disease is left unchecked and it spreads
to some of the “Big Boys” it is an absolute lights out event. It would
take years to recover from that. This is the most compelling reason for
coordinated intervention
-Could currency intervention achieve anything in the larger picture?
No. And for that reason it probably will not happen. The best
intervention could accomplish is buying some time for things to settle
down. But if things remain unstable for much longer the utility of a
short-term fix becomes larger.
-Are their any other considerations that might come into the decision?
I think so. Four come to mind.
a) The CDS market has been LEADING this market move. The Central
Banks HATE the CDS market and the role that it plays in our economies
and in the policy choices. The Central Banks can’t stop that. They have
no power. But they could intervene in the currency markets. Because of
the way things are connected, a jump in the Euro would also mean a
narrowing of the PIG CDS spreads.
b) Central Bankers have studied the impact of Coordinated
intervention for years. The biggest conclusion is that intervention can
re-establish “two-way risk.” This condition is vital to restoring
stability. There has been “no risk” to being short Euros and long PIG
CDS spreads. As long as the perception is out there that there is
little or no risk in these directional bets they will continue to move
in one direction. Intervention can reestablish the notion of two-way
risk. They do that by punishing market players that are constantly
pushing the bet farther. CBs hate speculators. They would like nothing
better than to catch them off guard and whack their pee pee.
c) China is a spectator to this in most respects. But their
currency is tied to the dollar. Therefore their currency has just gone
up in value by 10%. They hate that. Don’t assume that they have no say
in the outcome of this. They would love to see currency intervention
solve their problems.
d) If Paul Volker were running the show I think he would say, “Nip this one in the bud”. But Big Paulie is not in charge. Is he?
Will we see this headline?
EU, UK, Swiss, Japanese and US Central Banks Join in Coordinated Global Currency Intervention
Global Markets Rally
The odds are not good based on history. These things do not happen very
often. But many of the pieces are in place for a CB response to this
winter’s instability. Let’s put it this way. If they don’t intervene
the trend will continue and markets are in for one hell of a set back.
»
- advertisements -
Bruce,
Fiat means "I declare". Fiat currencies have value only because someone with a gun says they do. and the general public agrees to go along, partly due to fear, and partly due to convenience. Eventually, perception merges with reality.
Fiat currencies run on "faith"; that is, they are "faith-based" currencies. This means the power of central banks is measured by public perception. This perception therefore is more actively managed than anything else. Actively managing this perception gave us "Green Shoots", all the blather about a Fed exit strategy and exit strategy testing, the now-famous stock market ramp, and the declarations that the "recession is over". These are all obvious lies, but they were seen as necessary lies, and all those with a vested interest (power, money) in maintaining the existing system went along with the lies and willingly retold them.
Think back a few months to the most recent dollar crisis, when the Chinese were telling us "we hate you guys"; the Fed had to begin reducing its balance sheet as a show of confidence. You can see it on the chart; remember? The Fed is now back to expanding its balance sheet, probably paying par for junk MBS, and certainly paying par for junk Treasuries.
These measures, impossible to completely hide, threaten the public convergence of myth and reality on which the fiat dollar rests. Direct and stated intervention would merely be another way to do the same thing: support the myth. It's something they could do that they could say they haven't done before, but of course they have. A central bank prints $1.6 Trillion in new host currency and uses it to buy debt, putting that debt on its own balance sheet; that's not currency intervention? When the value of those MBS threaten the housing market / Fannie & Freddie / foreign MBS holders / the tax base?
Excellent, thanks
Bruce...thank you very much for an educational and insightful piece. This was excellent and most informative.
p.s. you outdid tyler and marla with the pee pee whacking!
and, for Dr. Dirty fans, "there's a skeeter on my peeter, whack it off......"
I don't think anybody in the Euro region actually cares what is happening. Here is my bet, Trichet is saying his thing and he is holding steady.
Look at it from his perspective:
1) I say the Euro is stable.
2) The Euro zone people believe me.
3) The Euro zone exporters are doing cartwheels on this weakness.
4) We can "bitch-whip" countries to clean up their act.
From the perspective of the Euro-zone THERE IS NO PROBLEM!!!!
From the perspective of the USD they are screwed!
Which currency crosses would be manipulated by central banks? The Euro people want a weaker Euro, so this is all good for them. The Obama people don't understand economics so they don't care. Barack probably thinks a stronger dollar is a vote of confidence in his imperial leadership. The Yen people definitely are not on board with this. That's the problem with currencies, they trade relative to each other, like trading cat poop versus a cat hair ball (I have cats). Both are yucky. On the other hand.....
My precious metal dealer has just sold out of nearly their entire inventory of silver American Eagle bullion coins, and gold seems to be selling well. It's as if people are using the temporary rise in the dollar and fall in precious metal prices to unload their hairballs and poop, lol.
IMHO this is a depression, with excess capacity, declining employment and consumer demand, banks on the brink, government finances on the brink. It's one hell of a mess.
If you try to take a step back, and big picture it, what you see is the entire developed world with too much debt, an aging population, too high a level of socialistic entitement programs, declining consumption, over capacity, and, declining employment.
The fiancial markets will once again have to find a new equilibrium based on enhanced risk in the Euro, another wave of deflation, and the door shutting on private credit. Looks like more Quantititative easing on the way, as we all become Japan or the UK--selling debt to ourselves to finance our bloated budgets. QE coming to Euro land via PIIGs bailout, what else can they do?
Emerging markets will get killed as the author alluded to. Declining demand for consumer products and commodities reprices risk into all those EM bonds and stocks and currencies. See Brazil.
All in all, the US could just come out on top again, when its all said and done. As mucked up as it is, our political and financial system is far more adaptable than those in most other countries. Just cut spending and cut taxes and its 1982. Probably have to wait until 2012 for that. If the Republicans grab the Congress in the fall the US markets will fly, like 1994. Don't be short then.
I like the cat stuff comment. However, as an average joe investor this is the most confusing markets ever. And the wild currency swings only make it worse to figure out what to do.
33% Precious Metals - Insurance
33% Equities - In case it all gets better
33% Cash - Keeping powder dry.
I have been in this mode since April of last year...and it seems that this diversified mode has allowed me to sleep well. But nearly one year later all this currency mumbo jumbo, gold bitches, and stocks to the moon/basement talk still keeps me frozen in my strategy. I have yet to see anything from the Governmnet, Markets, etc. that tells me what to do farther than 1 month out so I do not change my allocations.
So the question is: Would currency intervention make PMs, or stocks, or cash the place to be? I am having a hard time understanding who benefits the most in this scenario.
We didn't cut spending and taxes in 1982, we raised FICA payroll taxes to make Soc Sec solvent (please don't tell me money coming out of my paycheck going into gen'l govt funds is not a tax) and we cut top rate taxes from 70 to 28 percent..and Reagan along with a Dem congress, increased spending and deficit. Also, remember what the interest rates were in late 70s, early 80s, so the Volcker who was the grown up, started the high rates in Carter administration, made things tough when Reagan first in office also, but we benefited later in the 80s.
The golden time in US for whole general economy was not 80s and 90s, middle-class did okay then but not great. However market speculators in stocks and then real estate had some extraordinary runs in 90s and 00s. Golden time in US for general economy was the 60s and 70s, where average Joe with HS education could single-handedly support family of four, buy house, save, have a pension etc...and at that time we flatter incomes and higher taxes on rich and more regulations on businesses. Those liberal types things were left over from bearish 30s, when unions formed and financial regs took hold and remained largely in place when economy soared after WWII. I don't necessarily ascribe the good times in 60s and 70s to flat incomes, financial regulations, less class differentials of the time, there was a lot of things going on like the our lucky spot in the global economy, being the worlds manufacturer after Europe crushed, Soviet Union going off line taking E.Europe with it, and getting cheap commodities from former colonies of Europe/Japan. Just noting its more complicated than just tax rates.
From what I have seen in economic and monetary history in US, if you stick to either the liberal or conservative partisan narratives, you are missing a lot of what was really going on.
I still remember the intervention in 1985, it changed the $ trend for decades!
What happened? I'd be grateful to hear the story.
The Euro has been overvalued on the basis that the ECB will be the only one standing for a stable currency in terms of purchasing power. When Germans will be faced to the choice between not being able to withdraw their money from their Landesbank and accepting high single digit inflation for a while, they will choose the latter. The Buba will grumble but will cave in because it cannot afford to make German Banks broke.
At this point, the EU and the US would do better settling for a "truce" level around PPP level, between 1.1 and 1.2, and turn together to the biggest "beggar thy neighbour" back there is Asia. Expect trade or even current account restrictions before the end of the year.
Excellent article, Bruce. You've illustrated the rationale quite well, and I imagine your call will be viewed as quite prescient in the near future.
But what currency intervention could they do that would have any meaningful effect ?
Make one currency weaker/stronger than the others ? - that won't stop the contagion - it will just move it, provide redirection, or just confuse the markets.
Devalue all together - against what, gold ? No way the central banks want to show their fiat currencies are a busted flush.
Or perhaps (nuclear option), put some kind of exchange rate controls / capital movement controls in place, to prevent movement of hot money ?
I'm not an expert, a trader etc, just asking.
Slippery slope indeed... the race to the bottom continues.
I dunno, but "wack their pee pee" sounds pretty awful!
It's a technical term...
PIGS are Portugal Ireland Greece and Spain. Who said anything 'bout Italy joining the PIGS camp ?
Damn, your timing is impeccable.
February 12th there will be a "bank holiday".
FX Intervention is a temporary solution, and banksters and politicians love a temporary solution!
Bruce, you hit it out of the park. I'll bet this is exactly what comes next.
As a little 'retail' forex participant, believe me I've been keeping my head down today, and not peeping out again until the water looks calm.
As much as I hate the idea of a government-manipulated forex market - Christ, how BADLY can they mismanage it and screw this one up - I have to admit I'm eager for a bit of calming action.
After London and New York rocked the markets last night, Tokyo and Sydney seemed in shell shock all day today. As was I. I hate myself for looking longingly toward the arms of Big Bruvva.
nice article bk