 |
In the past month we’ve seen statistics that indicate the recession for major economies will be ending this year. And in some countries, like Germany, France and Japan, their recessions technically ended in the second quarter.
But do these statistics mean better times are ahead for consumers … more jobs … friendlier lending policies? Does a positive quarterly GDP, rising from the steepest global economic contraction in 60 years, mean that the risk of another shock to the global system has diminished?
Not likely.
In fact, central bankers around the world have littered recent statements with caution about downside risks and the overwhelming environment of uncertainty. Additionally, major economies have made it crystal clear that interest rates will remain low for some time.
The Fed said …
“Conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period of time.”
The Bank of England said …
“Recession appears to have been deeper than previously thought.”
The Bank of Japan said …
“Continued high downside risks to the economy.”
The European Central Bank said …
“Uncertainty is very high.”
 |
| Central banks around the world have put out the word that interest rates will stay low for some time yet. |
Even the Reserve Bank of Australia, a hawk on interest rates, did not change its bias toward lower interest rates.
And the Bank of Canada meets next week. Considering that the Canadian economy contracted worse than expected in the second quarter, it’s probably safe to assume they’ll be equally, if not more, cautious about the economic outlook.
In all, major central banks around the world have aggressively ratcheted down interest rates. And they’ve made it abundantly clear that market participants are ahead of themselves if they’re looking for moves in interest rates any time soon.
Next, look for official talk of coordinated and telegraphed “exit strategies” to be a heavily discussed topic at this month’s G-20 meeting.
The G-20’s Hypothesis:
Coordination Equals Stability
You might recall last April when the top political and financial leaders of the world got together in London. They came away with a commitment to respond to the global recession and financial crisis in a coordinated fashion.
So don’t be surprised if they break this time with a similar message about coordinated exit strategies.
Why work in cooperation with other countries?
Well, the domino effect of the financial crisis and economic downturn around the globe clearly shows how interconnected and interdependent economies have become under globalization.
The traditional response to economic recessions is protectionism. However, trade barriers raised during the Great Depression only served to prolong contraction.
But while benchmark interest rates remain stagnant across the world, there are incremental changes happening.
And that’s where …
A Play on the Pound
Looks Enticing …
Last month the Bank of England surprised the world when it announced it would expand its quantitative easing program. So after winding it down in July, they dusted off the printing press and cranked it back up in August!
And shortly thereafter, the Fed wrapped up its meeting on monetary policy by giving guidance that it would be ending its quantitative easing program. In fact, recent comments by Fed officials suggest that some areas of the plan could even end sooner.
Now, the outright purchases of government debt planned by both central banks are around $300 billion. As a percentage of GDP, that makes the UK’s purchases close to four times as large as the U.S.’s.
 |
| The diverging policy paths by the Fed and the Bank of England have created an ideal profit opportunity. |
This development makes for a very compelling trade in the British pound …
You see, in currencies, it’s all relative. And on a relative basis, the diverging policy paths by the Fed and the Bank of England are squarely negative for the pound against the dollar. And that’s precisely why the pound has taken its lumps over the past month, down 4 percent against the dollar from its high in August.
Don’t forget, the British pound was punished when risk aversion swept through financial markets and has benefited as risk appetite returned. So adding the influence from divergent monetary policy paths to the “high” uncertainty surrounding global economic recoveries creates two negative drags for the British pound.
All of this puts the British pound in a position of weakness and offers currency traders an ideal profit opportunity.
Regards,
Bryan
About Money and Markets
For more information and archived issues, visit http://legacy.weissinc.com
Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson and Bryan Rich. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Kristen Adams, Andrea Baumwald, John Burke, Amy Carlino, Selene Ceballo, Amber Dakar, Dinesh Kalera, Red Morgan, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.
Attention editors and publishers! Money and Markets issues can be republished. Republished issues MUST include attribution of the author(s) and the following short paragraph:
This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://legacy.weissinc.com.
From time to time, Money and Markets may have information from select third-party advertisers known as “external sponsorships.” We cannot guarantee the accuracy of these ads. In addition, these ads do not necessarily express the viewpoints of Money and Markets or its editors. For more information, see our terms and conditions.
|
© 2009 by Weiss Research, Inc. All rights reserved. |
15430 Endeavour Drive, Jupiter, FL 33478 |
