Friday, 21 October 2011

Yen reaches pre-WWII levels as FED hints at more easing

Interesting development on the FOREX market today was the unparalleled volume in the USD/JPY. The Japanese currency appreciated 0.9% to Y76.14 after it reached its all-time low of Y75.82. If you want to pick up this trade, tread carefully, as an intervention from from Bank of Japan is imminent on further signs of weakness. The Bank of Japan is trying to maintain the JPY at low levels to keep Japanese exports attractive, but doing so it hurts the Japanese savers who see their wealth generating lower and lower real returns.

Japanese efforts to suppress the Yen are failing

The Bank of Japan has intervened on the market several times to depreciate the JPY, but it only reinforced the long term appreciation trend. Some of the plunge was essentially technical as some stop-limits where pulled and thus forcing further selling.

FED pointing out at more printing

What sparked the interest of financial markets today and brought a fresh of breath air to the S&P500 and the DOW, not to mention the precious metals, has been FED Governor Tarullo's declaration on Thursday that there was "ample room" for policy makers to do more. From Reuters:

Tarullo said mortgage bond purchases should be on the table, a sentiment echoed by Boston Fed President Eric Rosengren in an interview with the Wall Street Journal on Wednesday.

Tarullo and Rosengren's comments mark the first public discussion of the possibility of more mortgage bond purchases, which were a controversial part of the first round of quantitative easing in 2009.
Other Fed officials said on Thursday the Fed's current policy stance is appropriate.

The idea that Quantitative Easing (what is essentially money printing) does not translate into higher inflation due to so called effects of sticky prices and low money velocity is still controversial. Even taking into consideration this thesis, QE will generate inflation, even if the lag will be long enough to stimulate US's way out of depression.

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