The Raging “Currency Wars” across Europe

By Gary Dorsch, Gold Seek The theater of the absurd became even more bizarre on Jan 22nd, when the European Central bank desperate to extract the Euro-zone’s economy from the quagmire of deflation and stagnation, decided it would try its hand at the magic elixir of “quantitative easing,” (Q€). Starting on March 1st, the ECB will inject €60-billion of liquidity into the Euro-zone’s money markets, each month until the end of Sept 2016. The ECB is the last of the Big-4 central banks to unleash the nuclear option of central banking – QE, – starting about six years after the Bank of England, the Bank of Japan, and the Fed began flooding the world markets with $7-trillion of British pounds, Japanese yen and US$’s. Proponents of QE argue that the UK and US-economies are among the best performing in the developed world today, and say the massive doses of money printing and near zero interest rate policies (ZIRP) are the main reasons why. Opponents of QE say the liquidity injections are mostly channeled into the bond and stock markets, – enriching the owners of financial assets, and very little of the QE-injections “trickle down” into the hands of the struggling masses. Instead, thanks to QE and ZIRP, the net worth of the world’s 400 wealthiest has mushroomed to a cumulative $4.1-trillion. The Richest 85-billionaires now control more wealth than half of the world’s population combined, or 3.5-billion persons. Many of the world’s ultra-wealthy were in attendance at the World Economic Forum in Davos, Switzerland this month, dining and conversing with the most powerful central bankers and finance ministers from around the world, and getting a few “hot tips.” Also in attendance, was the Bank of Japan chief Haruhiko Kuroda who welcomed the prospect of the upcoming “Tug-of-War” with the ECB over the direction of the Euro /yen exchange rate. “We very much welcome this QE action by the ECB,” Kuroda said in Davos. “The decision could end deflationary pressures and stimulate growth in Europe, which is good for the economies of Japan and the world,” Kuroda said.

However, when translating Kuroda’s jargon into plain English, what he really said to investors was; “The ECB’s decision could end deflationary pressures (ie; reduce selling pressure in the Euro-zone stock markets), and stimulate growth in Europe (ie; inflate EuroStoxx valuations and P/E multiples), which is good for Japan (ie; owners of Tokyo listed equities) and the world (ie the Richest-1%). On October 31st, 2014, the BoJ jolted the world stock markets sharply higher, when it stated its intention to buy ¥80-trillion of Japanese government bonds over the next 12-months, which means the BoJ would soak up all of the new bonds that the Ministry of Finance sells. The BoJ ramped-up its QE operations the same day the Fed mothballed its QE-3 scheme. The BoJ already holds about 20% of Japan’s outstanding government bonds, and if it continues to underwrite the entire deficits of the government, it could end up owning half of the JGB market by as early as in 2018. BoJ chief Kuroda says the massive printing of yen, – dubbed “QQE” in Japan is necessary to prevent a reversal into a “deflationary mindset,” that has stymied Japan’s economy for decades. “Countering such a trend is the most important thing we can do. Whatever we can do, we will,” Kuroda said. Reading between the lines, the “deflationary mindset” that Kuroda aims to turn around is the Bearish psychology that has plagued the Tokyo Stock Exchange for more than two decades. Since the BoJ unleashed QQE in Dec ‘13, the Nikkei-225 stock index has doubled in value to above 17,500-points, – thanks to a -50% devaluation of the Japanese yen versus the US$. ECB Ups the Ante against the BoJ; For almost two years, inflation has been consistently below the ECB’s target rate of +2%, with each month showing a lower figure than the previous one. More than six years after the collapse of Lehman Brothers and the start of the “Great Recession,” conditions are still at Depression-like levels in the peripheral countries of Europe, with double-digit unemployment rates, and ever-lower living standards and rising poverty that have become a permanent situation. Reflecting the deeply entrenched trend of deflation, the yield on Germany’s 5-year schatz turned negative on January 15th, to as low as -5-basis points (bps), before rebounding to +1-bps today. As such, the ECB unveiled its most aggressive effort to date to revive the region’s ailing economy (ie; inflate the EuroStoxx index) with a QE-scheme to print 1.1-trillion Euros and purchase government and private bonds starting in March. Thus, the BoJ and ECB will engage in hand to hand combat the Euro /yen exchange rate in the year ahead. Initially, the BoJ gained the upper hand over the Euro /yen exchange rate, when it struck first, with a surprise attack, by expanding its QQE scheme to ¥80-trillion /year. That act of “shock and awe” lifted the Euro to as high as ¥150 in December. However, the ECB quickly retaliated by driving German T-bill rates to zero percent, and -16-bps below Japanese T-bill rates. And of course, the ECB has upped the ante, by playing the Q€1.1-trillion -Q€ card, and in turn, knocked the Euro sharply lower to ¥130 last week. German firms are competing head-to-head with Japanese firms in the $3.4-trillion capital goods export market, and the central banks have the advantage of being able to move quickly. Politicians always turn to central bankers and say, “Can you fix it? Put some cheap money out there.” Together, these two heavy weight central banks are planning to inject a combined ¥10-trillion and €720-billion into the world money markets in one year’s time. But there is no quick fix.

Switzerland Stuns Markets by Giving Up on Currency Peg; On January 15th, the Swiss National Bank shocked the markets, in one of the most memorable days in the history of currency trading. The SNB swept the rug from under the feet of currency, debt, and equity traders alike, when it decided to abandon its defense of the Euro versus the Swiss franc. The SNB’s sudden withdrawal from the currency wars, sent the Swiss franc soaring by +20% within a few minutes, a move that rippled through global markets and wiped Sfr-155-billion off the value of the Swiss stock market. Continue Reading>>>

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