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Beggar Thy Neighbor - It's ALL OUT (Currency) WAR! Pt 2

Here Comes The Boom!

By now, everybody who cares knows about the Swiss National Bank's removal of its EUR floor, and the havoc that it caused to FX brokerages around the world (Currency Brokers Fighting Insolvency Are Learning the Value of Our Blockchain Technologies - the Hard Way). I explained to clients that what seemed like a stupid move by the SNB was actually a strategic move borne out of fear. Days later, the ECB came out with the QE package from hell (or heaven, depending on how you view perpetual bailouts), and my explanation gained lucidity for many.A single country devaluing, even if it's a significant global economy such as the US, will result in a rise throughout other major currencies. This rise will easily be absorbed. The problem is when the major economies of the world have a singular problem - the problem that the world has now, that was started back in 2008. That problem is a structural recession and slow growth. Now when the US, or more accurately from a chronological perspective, the EU/ECB devalue, they export unemployment/deflation to neighboring states who not only do not want it but are actively pursuing their own policies to eradicate it. What do these states do when unemployment is sent over to their countries? They retaliate by doing the same. Enter... War!

Of course, the story doesn't and there. This is a macro trader's nirvana, provided he/she has at least a modicum of insight.

It's All Out War!

As stated above, ECB President Mario Draghi, announced the deflation export attack on all nations who didn't have the central banking chutzpah to defend themselves, and the throwing down of the gauntlet even to those who do, self-preservation concerns prompted preemptive strikes from the northern Europeans and Asians. The Swiss National Bank would have had to expand a balance sheet that had already grown 3x in 2yrs to an exponentially larger size, and that growth would have been fueled by Pumping continuously depreciating euros onto it. While the Fed doesn't have to worry about mark to market losses like the average Joe, the SNB simply cannot continuously replace 1 value unit with .8 value units at an increasing rate without cracking the country. It's abandoning the Swiss franc’s cap to the euro marked a mini-Lehman moment (the maxi-moment I warned about clearly 8 years ago, see Is Lehman really a lemming in disguise? Thursday, February 21st, 2008). Since the SNB simply can't afford to outprint the ECB (only the Fed can do that) they decided to use negative interest rates (actually, they decided to make their rates negative-er, #NIRP4EVA, if you know what I mean) to go "BOO!" and frighten potential buyers of its currency. Sveriges Riksbank, or simply Riksbanken, is the central bank of Sweden. It is the world's oldest central bank and the world's 4th oldest bank still in operation. You would think they'd know what they're doing. Well, they say "Swedish central bank: Deflation isn't a concern". They worked very hard to find inflation as well:

  1. http://www.wsj.com/articles/swedish-krona-sinks-to-four-year..." target="_blank" style="color: #4c90fe; transition: color 0.2s linear;">Swedish Krona Sinks to Four-Year Low Wall Street Journal - Oct 28, 2014
  2. http://www.ibtimes.co.uk/swedish-krona-rallies-monthly-infla..." style="color: #4c90fe; transition: color 0.2s linear;">Swedish krona rallies as monthly inflation rate rebounds to positive International Business Times UK - Jan 13, 2015
  3. Of course, right after the SNB move,http://forexmagnates.com/breaking-nfa-raises-margin-requirem..." style="color: #4c90fe; transition: color 0.2s linear; line-height: 1.6;"> NFA Raises Margin Requirements for Swiss Franc, Swedish Krona

The Danish Central Bank, Danmarks Nationalbank cut its benchmark rates deeper into negative territory as well, all (actually, they did it twice) in a bid to protect the Danish krone’s peg to the euro without burning its balance sheet. Did the people up north succeed in defending against Draghi's deflationary war move? Let's see...

Expect to see practically all of the nordic countries to do what Switzerland did, of course they will be rather late to the party... Then again, better late than never.

 Central & Eastern Europe, had problems that they've worked through to the point they have been thought of as a safehaven. They have successfully weakened their currencies but the ECB has reversed those efforts. It's hard to believe, current rhetoric to the contrary aside, that they wouldn't not act to defend against this imported deflation. Poland: PLNEUR, Czech Republic: CZKEUR

 

North America, ran by the most powerful currency manipulator in the world and the central bank who taught the world how QE is done. The US has allowed its dollar to rise slowly, but this sudden spike will crash earnings (not to mention the plethora of faux economic activity which crashes them even more) which risks throwing the deflationary mud back where the Fed doesn't want it. See the USD climb to much and the Fed will once again show the world how its done!  Canada, through the Bank of Canada’s untelegraphed quarter-point cut in its overnight rate, after nearly 5 years of inaction, is also looking to join the CW (currency war) fray. Canada's economy is highly susceptible to oil prices, and we all know that those North Americans have been clamoring to ignite some inflation for years. Has oil cooperated as of late?

Although Canada's issues can be tightly correlated with falling oil prices, the last thing it needs is for the Canadian dollar to move higher, or even just to remain static. It, like everybody else, needs its currency to fall! But how can that be when everyone is running from the newly donned, low-yielding eurozone currencies and fixed-income assets. Canada: CADEUR, US Reserve Currency status and current king of manipulation: USDEUR

Asian economic engines, namely China, Korea, India and the inventor of QE and the one suspected of causing the ECB to act in defense of euro to fight back the unemployment exported over to the EU - Japan, are big exporters to the EU. As a matter of fact, that's likely their second biggest market behind the US. In other words, losing pricing power and traction there relative to the EU is a very, very big deal. China even had the balls to go at it with the big daddy, the US. Remember?

  1. ·US says China 'manipulating' renminbi - FT.com
  2. ·China currency manipulation: How does it harm the U.S. ...Slate
  3. ·China: Currency Manipulator No More - Forbes
  4. ·Senators renew push against China currency 'manipulation ...

If you remember from part 1 of this series and the impossible Triangle, or the trilemma...

The Impossible Trinity or "The Trilemma", in which three policy positions are possible. If a nation were to adopt positiona, for example, then it would maintain a fixed exchange rate and allow free capital flows, the consequence of which would be loss of monetary sovereignty.

Well, China uses monetary controls with a banded peg to the USD. that peg is bursting at the seems since the ECB did its thing. It has also cut its rates, like everybody else...

  1. ·Economists React: Will China's Interest-Rate Cut Make a ...blogs.wsj.com/chinarealtime/.../economists-react-wil...Nov 24, 2014 - Economists React: Will China's Interest-Rate Cut Make a Difference? ...According to the statement, the move “does not signal that the direction  ...
  2. ·China Central Bank PBOC Cuts Interest Rates - WSJ www.wsj.com/.../china-central-bank-pboc-cuts-inter... Nov 23, 2014 - In a surprise move, China cuts interest rates for the first time in more .... on an economy of about the same size) the government did nothing.
  3. ·China's interest rates: The right call | The Economist www.economist.com/blogs/.../2014/.../chinas-interest-rate... Nov 21, 2014 - CHINA has cut interest rates for the first time in more than two years, ...be surprising if China did not follow up with more rate cuts and more  ...
  4. ·China cuts interest rates to spur growth, ease debt pressure ... www.reuters.com/.../us-china-economy-rates-idUSKCN0J511020... Nov 21, 2014 - BEIJING (Reuters) - China cut interest rates unexpectedly on Friday, stepping up efforts to support the world's second-biggest economy as it ...
  5. ·China's Surprise Rate Cut Signals Desperation, Bad News ... www.forbes.com/.../chinas-surprise-rate-cut-signals-desperation-b... Nov 23, 2014 - What does the PBOC's out-of-the-blue rate cut suggest? ... Harrison Hu and Ning Zhang of UBS predict interest rates will fall by 50 basis points  ...

So, China has tried the fixed rates and monetary policy, but wait a minute.. China has capital controls as well! If the trilemma holds true, then capital controls are to be broken (like in nearly every totalitarian state that attempts to be part time capitalist), interest rates are going to sprawl out of control (as I have cautioned in the past), or the fixed rate peg will be broken (ala Switzerland) on the horizon or there will be a distinct failure of a combination of the efforts. I'd choose the latter if I were a wagering man.

Very recently, China injected liquidity into its banking system  - both in response to its slowing economy and concern of stresses in the banking system surround the Lunar New Year holiday which is retail nirvana for the country.’s biggest shopping season. The People’s Bank of China tied the yuan to the dollar via a trading band, and the dollar has appreciated significantly - particularly in relation ot the euro and just about everyone else's currency. This is bad news for an export nation that's been running on faux activity for some time now, and China's southern manufacturing centers are vulnerable. So what does China do? Check the headlines:

China has taken another page out of the Japanese, American and ECB handbook and declared war on its neighbors by exporting unemployment to those who are economically proximal.

 Anyone who wants to get their practice in BEFORE we implement 10,000:1 leverage should feel free to download the trading client, the tutorial and related research here.

In the next two installments we wil surgically dissect the banking domiciles (I think these countries are in much more trouble than any of these bank analysts are saying) and even more forensically, the banks themselves. Since this research is sort of expensive, I will not go too deep, but I will put a sample "armageddon" trade out and explicitly illustrate it.

Quick note: The research that was originally disseminated through BoomBustBlog is now being offered through Veritaseum, my new venture, as well as transaction services to assist in monetizing said research. Anyone interested in the services or the software should feel free to email me