Record low interest rates on U.S. Treasuries are here to stay, despite expectations a year ago that the end of the quantitative easing would pressure stocks and bonds by causing yields to rise.
[quote] The day is not far off when the economic problem will take the back seat where it belongs, and the arena of the heart and the head will be occupied or reoccupied, by our real problems – the problems of life and of human relations, of creation and behaviour and religion. [/quote]
The US has a quarter of the world’s prisoners, but only 5% of the world’s population, so the “tough on crime” approach of the past 40 years has not worked. It has left a trail of social and economic destruction, creating broken families, alienating working-class black communities and producing high levels of recidivism. The time for reform is now.
The prospects that the Federal Reserve would begin slowing its purchases sparked a market meltdown in 2013. The “taper tantrum”, as it was dubbed, destabilized the capital markets. Now it is as if the markets have had a second tantrum, but this time US Treasuries rallied.
Many participants seem confused. Despite the talk about the dollar by different Fed officials, dollar policy is set by the US Treasury. Secretary Lew has been clear.
First he reiterated the 20-year old mantra of a strong dollar being in US interest. Despite the polemical tactics to reduce this claim to absurdity, it does indeed have real and important significance. Proof is consider the impact of the opposite. If Lew would have said something to the effect that a strong dollar no longer served US interests the destabilizing impact would be immediately evident.
Equity markets faced declines globally as the IMF downgraded growth expectations and the Federal Reserve said a fragile U.S. economy required more accommodative monetary policies in the short term.
The dovish FOMC minutes have pushed the consolidative tone into a dollar correction. Asia and European markets extended the dollar decline. These losses brought the greenback near initial retracement objectives or technical targets.
The euro approached $1.2800 before running out of steam. Sterling poked through $1.6200 but has steadied ahead of the 20-day moving average near $1.6240. The dollar fell to JPY107.60, holding above support pegged in the JPY107.30-50 area.
Corrective forces continue to grip the foreign exchange market. Many expect the dollar’s downside correction/consolidation to end today. Technically-inspired short-term participants often see 3-4 day counter-trend moves to be typical of market moves. Fundamentally-inspired traders expect the FOMC minutes, which will be released in the North American afternoon, to be read by the market participants with a hawkish bias.
Global growth is going to decelerate while American workers get fewer jobs as employers expect more for less.
Corrective forces continue to take hold of the foreign exchange market. It is long overdue and does not appear to be sparked by fundamental developments per se. Many short-term momentum participants had jumped aboard what had looked (and behaved) a one-way train. Late dollar longs were in weak hands, and once the momentum faltered, were squeezed out.
However, the dollar pullback has been minor, so far. We suspect is may have a little more room to run, but anticipate a hawkish read to the FOMC minutes that will be released in tomorrow in the NY afternoon.
