Daily Forex Brief
London: Monday 5th September 2011 |
Ben must re-open his policy tool-box
The continuing malaise in the US jobs market lifted hopes that the Fed may need to re-consult their policy tool-kit, with renewed speculation that QE3 would be back on the table. The difficulty for the Fed Chairman in terms of implementing further QE is numerous. The success of previous rounds of QE has been mixed - they certainly lifted both commodity and asset prices, and thereby possibly thwarted a dangerous lurch into deflation, but failed to materially impact on growth, weighed heavily on the dollar, and alarmed foreign creditors. An additional challenge for the Fed Chairman is that some of his fellow policy officials are becoming increasingly uncomfortable with the extraordinary risks that the central bank are running, in terms of both credibility and long term inflation. Quite rightly, many Fed officials maintain that Washington should be doing more to reduce America's fiscal obesity through a root-and-branch review of entitlements and a program of structural reforms designed to raise productivity and growth potential. However, as is the case almost everywhere across the major advanced economies right now, the political leadership to implement such a transformation is lacking, and as a result central banks are left to carry the weight of most of the policy adjustment. Should the Fed Chairman find additional QE too hard in the near term, then there is a growing school of thought that he may opt for a sizeable twist operation, whereby the Fed swaps short-dated maturities on their balance sheet in favour of longer-dated securities. It was this speculation that contributed to a significant flattening of the yield curve on Friday, with the US 2-30yr yield curve narrowing by some 15bp. With risk aversion on full display once more on Friday against the backdrop of growing double dip concerns, it was again a fabulous day for bonds, gold and the Swiss franc and a dreadful one for stocks and risk assets. Both the US and German 10 yr yields are trading below 2.0%, the gold price jumped to $1,880, and German equities were down under 5,500 (a loss of 4%). In the fx market, high-beta currencies such as the Aussie and the Loonie fell back, the former now under 1.06. |
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Also in today's Daily Forex Brief: - US jobs picture still dreadful
- Greece sinks deeper into the mire
- Swissie shining once more
- Berlusconi's fiscal reverse triggers further contagion
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