The Race for the Bottom
The gloves are coming off as around the globe the currency tensions are heating up and the printing presses are coming out because when it comes to currencies, everyone wants to be on the bottom. In fact things are getting so heated that the International Monetary Fund is warning that governments are risking a currency war if they try to use exchange rates to solve domestic problems which they say if translated into action would represent a very serious risk to the global economy. I said yesterday, in a currency war the country with the most ink wins as countries try to print themselves to prosperity in a global race for the bottom.
Japan raised the stakes yesterday by hitting critics of their intervention policy by showing the world that there is more than one way to try to intervene in your currency. The Bank of Japan, by cutting their interest rate to 0%-0.1% and buying $60 billion in assets, was sending a message of hypocrisy to the critics of their intervention. Now if the Japanese are going to print more money what choice does the Untied State have? The markets believe that this will force the Fed to act. Other countries feel that this rush to print money and monetize debt is putting them at a disadvantage and they threaten to play the same game to lessen the impact from the fiscal shenanigans from other countries. Now what is sad about this war is it is overshadowing the fact that we actually saw some decent economic data. We saw expansion better than expected in the ISM non-manufacturing number service sector and an optimistic job component.
Despite this no one can deny the impact that this is having on the oil market as well as other commodities. Even after QE1 there were many people that believe quantitative easing had little impact on oil prices. They were and are wrong. If the Fed wants inflation they get inflation. The price of oil the day that the Fed said that they were prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate the price of oil closed at approximately $73.52. Yesterday, 10 trading sessions later, crude settled at approximately $82.65. To give you the magnitude of that mood, in the five years leading up to the economic crisis oil used to add approximately that much to the price in a year’s worth of trading time. When paper loses value the things you buy with it just become more valuable.
Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or at firstname.lastname@example.org.