This week I had the extreme pleasure of recording a Financial Repression Authority podcast with Zoltan Poszar (moderated by Richard Bonugli, of course). We covered the entire global scene from yield curves, petro dollars and the underlying basis to all fiat money transactions. It is worth a listen to learn that the fabricated, algo-driven headlines are not the contextual basis of major shifting sands in the global financial system. There is far more nuance locked underlying the moves by policy makers around the world.
We discussed the present value of the YEN/YUAN currency pair and its historical price relationship, which brings it back to the December 1993 level, which was right before the Chinese authorities devalued the currency by 50%. This comes at an interesting moment as the recent weakness of the YEN has generated concerns about the negative impact of high global energy prices on a Japanese economy heavily dependent of imports of oil and natural gas. Five weeks ago the YEN was anointed a critical safe haven asset and a repository of nervous funds.
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Aiding the YEN weakness has been the most recent actions of BOJ Governor Kuroda in an effort to sustain Japan’s Yield Curve Control by keeping ten year JGB yields at 0.25% or lower. The ECB and Federal Reserve’s latest pronouncements about their asset purchase policies makes Japan an odd man out as they are still aiding a weaker YEN. Even former BOJ Governor Sakakibara said in a statement, “Current weak yen positive for economy, further weakening beyond 130 would cause problems.” These types of statements fall afoul of G-7/G-20 guidelines as monetary policy are not to be used to gain a trade advantage by competitively weakening a nation’s currency through keeping one’s interest rates low in the face of rising inflation. (YOU CAN STOP LAUGHING NOW.)
To add to the hypocrisy of global “agreements,” the Swiss central bank last week left its overnight rates at NEGATIVE 75 BASIS POINTS. It said in a statement the bank “is willing to intervene in the foreign exchange market as necessary, in order to counter upward pressure on the Swiss franc. In so doing, it takes the overall currency situation and the inflation rate differential with other countries into consideration.” The currency intervention by the SNB is always thought to be directed at the EURO but the SWISS and Japanese compete in many markets for high-tech, high-engineered goods, including pharmaceuticals. At the close of the first quarter, the CHF/YEN cross was the strongest the pair has been since August 1980.
Central bank interest rate policies are not one-dimensional and may be BEGGAR THY NEIGHBOR as well. While the SNB breaks no G-7 strictures (since it’s not a member), its regarded status makes its decisions critical for the underpinnings of an equitable global financial system. Oh well, Larry Fink proclaimed the end of GLOBALIZATION so everyone for themselves? Enjoy the Pozsar discussion as we tread into the SECOND QUARTER. Let’s do as suggested by Louis Gave: adapt, not forecast.