Why the World’s Biggest Market Is Acting Erratic
The world’s biggest financial market is acting erratic.
We’re not talking about the global stock market, or even the bond market. We’re talking about the global currency market.
The currency market is where paper money trades hands. It’s much bigger and more important than the global stock market. Yet the average investor almost never hears about it.
That’s because major currencies rarely move more than a fraction of a percent in a day. When they do make big moves, they ripple across stock, bond, and even real estate markets. Paper currencies are the backbone of the global financial system, after all.
Today, we’re going to look at some recent big moves by major currencies. As you’ll see, we could see a lot more moves like this in the months ahead.
• The British pound nosedived 1.4% on Friday…
It was the pound’s biggest one-day decline in three months…but it could have been much worse.
At 7 a.m., Hong Kong time, the pound plunged 6% in two minutes. You almost never see a paper currency move that much and that quickly.
Many media outlets blamed the “flash crash” on high-frequency traders (HFTs). As you may know, HFTs are computers that trade according to algorithms. Occasionally, they’ll move billions of dollars at once. They can turn a routine selloff into a full-blown bloodbath.
The market normally “corrects” these moves. But the pound still ended Friday down big. This isn’t the first time the pound has crashed this year, either.
• The pound plunged 8.1% on June 24…
As you may remember, Great Britain voted to leave the European Union (EU) on that day.
The unprecedented decision, known as “Brexit,” triggered the pound’s worst day in decades. It also knocked more than $3 trillion from the global stock market in two days.
Days later, many analysts said the worst was over. The consensus was that Britain’s economy and financial system would experience a “soft landing.”
You can see in the chart below that the pound is now down 19% since Brexit. It’s trading at its lowest level against the U.S. dollar in more than three decades.
• Dispatch readers know exactly why the pound never rebounded…
Days after Brexit, the Bank of England (BoE) rolled out a giant “stimulus” package.
It dropped its key interest rate from 0.5% to 0.25%. And it expanded its quantitative easing (QE) program. That’s when a central bank creates money and pumps it into the financial system. It’s basically another term for money printing.
As we’ve said many times before, these measures never actually help the economy. All they do is inflate financial asset prices and weaken paper currencies.
The pound isn’t the only major currency that’s tanked recently…
• The yuan, China’s currency, hit a six-year low on Monday…
But unlike the pound, traders didn’t drive the yuan lower. The People’s Bank of China (PBOC) did.
You see, the yuan doesn’t trade freely like most other major currencies. Instead, it’s loosely “fixed” to the value of the U.S. dollar. The PBOC sets a price point and the yuan can trade within 2% of that midpoint.
Last August, the PBOC shocked the global financial markets by devaluing the yuan three times. The unexpected devaluation triggered a global stock market selloff that erased 11% from the S&P 500 in just six days.
On Monday, the PBOC devalued its currency again. It lowered the yuan’s midpoint 0.3% from 6.7008 against the U.S. dollar to 6.6778. That’s the currency’s lowest fix since September 2010.
The latest devaluation didn’t catch the global financial markets by surprise this time. But that doesn’t make Monday’s devaluation any less important.
• China’s economy is growing at its slowest pace since 1990…
Many analysts think the PBOC weakened the yuan again to stimulate the economy.
You see, China’s economy revolves around exports. And a weaker yuan makes China more competitive.
The Chinese yuan has now fallen 3.2% against the U.S. dollar this year. But it could be headed even lower over the next 12 months. Reuters reported on Monday:
On Oct. 6, a Reuters poll of more than 70 foreign exchanges strategists showed they expected the yuan to fall another 3 percent by next September.
In other words, the Chinese government is prepared to do what every other central bank does these days: stimulate its economy at the first sign of trouble.
• Meanwhile, the U.S. dollar hit a 10-week high today…
It’s now up 5.4% since May…but that’s only because the Federal Reserve is doing less damage right now than other central banks.
For one, it’s not “printing” money anymore. It’s also talking about raising interest rates.
But Louis James, editor of International Speculator, doesn’t think you should put much stock in what the Fed says. Louis wrote in this month’s issue of Casey Resource Investor:
Despite much flapping of lips, the Fed has once again failed to follow through on its threats to raise interest rates. First it was going to be four rate hikes this year. Then it was two. So far, it’s been zero. They tell us all is well and getting better, but their inaction says they’re lying.
If the U.S. economy runs into serious problems like we expect, the Fed will do what central banks always do: keep the easy money flowing. That’s because central bankers all use the same blueprint. Louis explains:
The Fed and central bankers around the world are following established economic doctrine and preferring policies they know, rather than trying anything different. Negative interest rates are a pretty extreme form of their usual tinkering with interest rates, but still a form of the same woefully inadequate method.
Like other central banks, the Fed will eventually go too far with its monetary experiment.
• REMINDER: Casey Research founder Doug Casey will be in New Orleans later this month…
Doug will be presenting at the New Orleans Investment Conference from October 26–29. If you’ve never heard of this conference, it’s one of the most highly regarded investment events in the world, and this year is expected to be the best one yet.
Along with Doug, you’ll get to hear from some of the most respected names in the business, including P.J. O’Rourke, James Grant, James Altucher, Dennis Gartman, Rick Rule, and dozens more. You’ll also hear from our own Louis James and Crisis InvestingEditor Nick Giambruno.
And as a Casey subscriber, you’ll have access to an exclusive event where you and other subscribers will have the opportunity to take part in a Q&A session with Doug, Louis, and Nick.
Keep in mind, space is limited. If you’re interested in attending this year’s event, we recommend you sign up soon. You can learn more by clicking here.
Chart of the Day
The currency market looks like it’s “pricing in” a Hillary win.
Today’s chart shows the value of the Mexican peso versus the U.S. dollar this year. You can see the Mexican peso’s performance since the start of the year. It hit an all-time low on September 26, which happened to be the same day of the first U.S. presidential debate.
Now, if you’ve been following the U.S. presidential race, you’re probably not surprised the Mexican peso tanked. After all, one of Donald Trump’s main agendas is to “build a wall” along the U.S.-Mexico border.
However, you can see the Mexican peso has surged 5% since the first presidential debate. This tells us Trump’s chances of becoming the next president are deteriorating by the day…at least according to the currency market.