FX macroeconomics
immediately dropped against the majors. US Treasury jumped, driving yields lower. Global equity markets rallied. By the close of trading on Friday everything had reversed: the Euro had strengthened against the US Dollar, Japanese Yen and Great British Pound. Yes, strengthened, not weakened. Tis was attributed to a choice of phrases in the follow- up press conference. Do words have more value than actions? Te reversal phenomenon is not unique. Bank of Japan President Haruhiko Kuroda surprised markets by unexpectedly creating a tier system with a negative deposit rate, yet the Yen continues to strengthen against the majors. Te Bank of England had little success weakening the pound with policy tools for years on end. It took a threatened session from the EU to weaken the Pound Sterling
and it has since recovered! Sweden, Switzerland and Denmark have imposed negative rate regimes, bond purchasing and currency intervention with little effect. Continuing global QE has caused great angst amongst US Fed board members, so much so that the Fed actually raised rates in December of 2015. Hawkish US Fed board members persist in rattling the rate hike sword in public speeches and television interviews. Te Fed has even declared potentially four 2016 rate increases. In spite of all this, US Treasuries continue to gain!
Why should currency exchange have become so obviously disconnected from unconventional monetary policy? Clearly, as determined and innovative as advanced economy central bankers have been, they have not fully determined the root cause of
this complete misbehavior of markets, else it would have been corrected by now. Tere must be greater forces at work here. Recall that (in theory) the sum total of central bank assets adds up to the sum total of currency. Te idea behind quantitative easing is to exchange high quality assets for central bank currency notes. Tis increases
the supply of notes
and decreases the supply of floating debt. Tis lowers interest rates and increases cash liquidity. It’s the tried and true supply and demand control method. Yet, QE stubbornly defies expectations.
A closer look at US Federal Reserve actions since the 2008 crises reveals an even more interesting phenomenon. Before ending its asset purchase program, the Fed accumulated over $4 trillion in US
Figure 4: US Treasury Futures
50 FX TRADER MAGAZINE April - June 2016
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