Forex Market Directions

The Last Monetarists
Thursday and Friday presented the unusual spectacle of American equities, Treasuries and the dollar all falling at the same time.

The price of 10-year Treasury Notes dropped more last week than any week since June 2008; the rate rose above 3.4% for the first time since last November. The dollar tumbled below 1.4000 to the euro for the first time this year. Its 3.6% loss for the week was the largest decline against the euro after it sank 4.8% in the five days to March 20th. And the Dow declined four days out of five, rising over 200 points on Monday but finishing the week flat.

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Looking for the Lost: the Shrinking American Consumer

Economic analysis anticipates the future through mathematical equations. If interest rates are reduced by a certain percentage then the economy can be expected to grow by x factor. The difficulty in accurate prediction arises from the assumptions disguised within the formulas. For the American consumer it is beginning to look like one of those basic assumptions has changed. The consumer that reliably spent most or all of his or her disposable income has become a cautious, price conscious shopper. Value and replacement rather than consumption and excess have become the bywords of the family budget.

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How Will We Know When the Recession Ends?

There are two standard definitions of recession. The first, two succeeding quarters of negative GDP is traditional, straightforward and evident as the statistics are released. By this definition the United States has been in recession since the third quarter of 2008 when the economy contracted by 0.5% followed by a negative 6.3% in the first quarter of 2009.

The second definition is compiled by the National Bureau of Economic Research (NBER), a private research organization, and uses a far more elaborate set of criteria to determine ‘business cycle’ turning points.

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The Curious Case of Missing Intervention

Has central bank currency intervention gone out of style? Two extreme cases in the past year should have beckoned intervention: the all time high of the euro against the dollar last summer and the 15 year high of the yen in late January. But despite the damage that was being done to the European and Japanese exports by their strong currencies, neither central bank intervened. Why have central bankers eschewed one of their primary tools for effecting violent change in the currency markets?

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Credibility and the ECB

It has been a long road for the European Central Bank and its head Jean Claude Trichet. In less than a year the most anti-inflationary of the world’s central banks has moved from strict monetary conservatism to the verge of sub 1.0% interest rates and to serious consideration of quantitative easing, leaving many principles in its wake.

It is not the fact that the ECB has followed the rest of the world’s central banks in pouring liquidity into the banking and monetary systems of Europe that is surprising but that at almost every step of the road they have either denied that such actions were contemplated or indicated that the end to these policies could be imminent. Their rhetoric has proved a far less than perfect guide to their actions.

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