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It is rather worrying how little coverage there is in the Western media about the increasingly nasty escalation of the China-Japan stand-off over a few small islands. The Arab Spring which was galvanized through the enormous power of social media may have parallels in China given the strangle hold the authorities have there over main stream media - social media is rather more difficult to keep the reins on…
In the markets this week ,the big factor continuing to reverberate around the globe is the de-facto potentially unlimited US Quantitative Easing. This huge round of monetary easing is unparalleled in the US and the world to date including Japan.
Back when QE started in 2009 I forecast that it was a ‘Pringles’ event – once started you just can’t stop. And so Ben Bernanke is proving. Many Countries around the world are not unsurprisingly, no particularly enamoured by this new course of money printing. US dollar devaluation only makes it more difficult for developing economies to grow as their products become more expensive on global markets.
The US, by printing money, is trying to generate inflation to help it wipe outs its debt. This inflation though is also being felt in other countries. Their response is to also to try and reduce the value of the currencies through their own forms of QE.
With the dollar falling, there are some potential lucrative investment gains to be made. As the dollar falls, risk assets gain. Also as the dollar falls, the other side of the equation is that the “pair” currencies strengthen, particularly of havens like the Swiss Franc and the Norwegian Krone. Similarly, commodities also generally rise. It is quite hard to see how more money printing in the US and elsewhere does not underpin commodity prices – given the value destruction in the mining sector this year that itself provides a good long-term position for finding value - a stance that is opined in the current edition of spreadbet magazine - http://issuu.com/spreadbetmagazine/docs/spreadbet-magazine-v9_generic.
Finally, in terms of opportunities presented through a falling dollar, this also pushes up food prices. There is of course quite rightly a stigma attached to betting on food prices but spreads and ETF’s are offered.
Below is the HSBC graph of the effects of QE on the dollar – it does work in lowering the dollar and this in turn sets off a competitive devaluation in other currencies around the world. It provides the only solution governments can think of to the current sovereign debt crisis and this is to devalue their debt instead of paying it off as the burden is too large.
The currency wars are here to stay and traders should look to this as a theme to underpin their trading strategies in 2012/13.