Interpreting Possible Fed Taper Scenarios

The US economy slowed in the months since the idea of QE3 tapering was first floated. In light of recent price developments, we examine the case: to taper or not to taper?

The Federal Reserve’s balance sheet has jumped by over $3 trillion since the global financial crisis erupted in 2008. QE1, the first large scale asset purchase (LSAP) program was bold: it mind as well as saved the entire global economy. Just how bold? Fed Chairman Ben Bernanke won TIME Magazine’s coveted “Person of the Year” anointment in 2009.

QE2 was similarly successful, but not met without its critiques. A $600 billion bond-buying program was nothing to shake a stick at; it propelled global equity markets higher from November 2010 through June 2011, before the Euro-Zone crisis decided to wake up and the U.S. lost its ‘AAA’ rating at Standard & Poor’s for continued political brinkmanship (which continues today).

QE3 has proven to be the least effective and most controversial easing plan to date, more so than the even bolder measures taken in Japan by the government and the Bank of Japan, collectively known as ‘Abenomics.’ When the Fed announced QE3 in September 2012, market pundits were convinced that U.S. yields would plummet and the U.S. Dollar would be thrashed – more of the same of QE1 and QE2. QE3 was dubbed “QE-infinity” given its open-ended nature. But instead, with the U.S. economy improving, and yields shooting up in favor of a stronger U.S. Dollar, there’s growing support inside and outside of the Fed for a reduction in QE3.

There are several reasons to taper and not to taper, and they will be weighed by the Fed at its future meetings as the central bank eventually winds down its purchases. On the positive side, the fiscal drag thanks to the budget sequestration has proven much less daunting than previously forecasted, and the U.S. fiscal deficit is falling at its fastest rate in over 50 years. The U.S. unemployment rate is now at 7.0%, as low as it’s been since 2008.

The negatives are evident as well. Labor market growth has slowed in recent months, and Nonfarm Payrolls figures have eroded through midyear. Consumption has started to fall, and that may be a symptom of recently higher interest rates; higher borrowing costs reduce disposable income, and with wage growth dead, it is likely that higher rates remain a negative influence on the U.S. economy. These consumption fears have manifested in soft inflation figures throughout 2013.

Whether or not the Fed tapers QE3 will be determined shortly, but given the meteoric rise in U.S. yields the past several months, any outcome – even a $15B taper – could provoke a pullback. Consider that within the past six months, the U.S. Treasury 10-year note yield was as low as 1.631% on May 2, and had risen to as high as 2.979% on September 5 – over a 40% increase.

We thus suggest: if the Fed decides only on a modest taper $0B-10B/month, there is a significant scope for U.S. yields to pullback. Between $10B-20B/month, recent downside pressures in emerging markets and upside pressures in U.S. yields will remain; these will continue to manifest into further emerging market FX and high yielding FX weakness.

Scope for Recovery by Australian Dollar Limited as Labor Suffers

The Reserve Bank of Australia cut its key benchmark interest rate to a record low 2.50% earlier this year, highlighting the central bank’s concerns over the sensitivity of the Australian economy to turmoil in emerging markets.

When discussing Australia at the turn of the year, we suggested that: “Now, with rates at all-time lows, it’s a good moment to reflect on why we’re in the current predicament. After all, dovish monetary policy is only implemented when worries of an economic slowdown persist.”

These concerns were well-informed, as the Australian labor market has only deteriorated over the course of the year, forcing the Reserve Bank of Australia to cut its main interest rate to a record low of 2.50% at its August policy meeting. This is a significant step lower from the 4.75% rate employed as recently as November 2011; an aggressive rate cut cycle the RBA has employed, indeed.

Nevertheless, it’s evident that concerns surrounding Australia will continue. The country’s most important sector, mining, continues to show signs of slowdown, and government advisors have reluctantly admitted that the global commodity supercycle – driven by rapidly growing emerging markets – may be finished.

We continue to believe that the changing economic climate of Australia will play a negative influence on the Australian Dollar. The labor market remains a primary concern, and has proven to be a major negative influence on the Australian Dollar in recent months:


Over the past two-plus years, after the AUDUSD peak near $1.1100 in the summer of 2011, the RBA’s aggressive easing cycle, in part to help soothe fears over the labor distress, has driven the AUDUSD down to its lowest exchange rate since September 2010, below $0.9000 in August.

Further pressure on the Australian labor market, and thus the Australian Dollar, seems likely. Whereas the AUDUSD was quite stable near $1.0500 for several months while labor markets deteriorated, it’s clear that reality has set in. Despite several rate cuts since November 2011, Australia’s unemployment rate has increased from 4.9% in April 2011 to 5.8% in August 2013, the highest rate since August 2009.

Scope for recovery in the labor market is limited at best as long as the commodity cycle slowdown persists. Data compiled by the RBA in August showed that base metals prices, perhaps most indicative of economic strength in the mining sector, sunk to their lowest level since late-2009 by midyear, an ominous sign considering the time before prices had reached that level it was on the way lower by another 30% amid the global financial crisis of 2008.


Base metals prices continue to be the guiding light for Australia – and should they remain subdued going forward, we suspect that dovish guidance will remain in place at the RBA, serving as a consistent, bearish influence on the Aussie for the remainder of 2013.

Steel, iron ore and coking coal

Chinese Growth Slows, Hurting Regional Trade Partners

Our last update on the Chinese economy expressed concerns over the future path of growth. The transition to the free market from a centrally-planned state has proven to be difficult as the government fights financial and political corruption, a growing middle class, and international pressure to liberalize its currency, the Yuan.

Chinese growth is slowing, but there’s nothing that the once frequently interventionist government is going to do about it. In part, growth slowed alongside lending activity, as the People’s Bank of China has maintained tighter monetary conditions for two main reasons: as it attempts to weed out illegal and corrupt banking practices that take place off companies’ balance sheets, “shadow banking.”

If only to consider the scope of this problem, on June, the interbank lending rate, overnight SHIBOR (local equivalent to LIBOR), rose by an astounding 578-basis points to 13.4%. In comparison, the 1-week SHIBOR rate rose by 292-bps to 11.0%; this inversion of the SHIBOR curve is a strong indication of extremely tight credit conditions. Typically, yield curves invert when liquidity is a problem; the fall of 2008 was plagued by this issue in the United States in particular.

In our last post regarding Chinese growth, we said, in a ‘tongue-in-cheek’ manner, that “There’s one major caveat to Chinese data that is truly inapplicable to any other global economic force: you just don’t know if you can trust it. Chinese data seemingly comes out of a black box, where Chinese government readings of the economy tend to outpace private sector readings, or even eclipse foreign government estimates of economic activity.”

Were those views ever vindicated: in June, the Chinese government said that so-called arbitrage transactions distorted trade figures in a manner favorable to stronger growth. From Bloomberg: “The transactions “resulted in abnormal growth in mainland-Hong Kong trade for a few months” since the fourth quarter, Shen Danyang, a Commerce Ministry spokesman, said at a monthly briefing today in Beijing. “Even if these arbitrage trades are not necessarily illegal, they are not fully compliant with regulations. That’s why the government has been concerned about this.”

As the government faces these issues and more on the way to opening up the Chinese economy even further, it’s evident that any new policies will be geared towards a more regulated, transparent economy. Accordingly, to prevent fueling a housing bubble (which is a concern now), the government is unlikely to implement further fiscal stimulus in the near-term. This has and will leave the economy weak in 2013:

China GDP

As long as Chinese growth remains in a rut, global trade will remain dampened and hopes for broader global recovery will be teeter. An ongoing concern for Australian policymakers, signs of slowing Chinese growth continue to weigh on the economy, where the Reserve Bank of Australia cut the main rate to a record low 2.50% in August.

The reasons behind the Reserve Bank of Australia’s rate cut are critically important, and are why we believe that, thanks to China, the Australian Dollar could remain under pressure in the interim.

European Growth Rebounds and Bolsters Euro Turnaround

This post will discuss the improving economic conditions that have started to emerge from the Euro-Zone. Policymakers have a difficult task of balancing a diverse regional economy marked by declining rates of production, consumption, inflation, and overall growth, all of which are exacerbated by a recently-strong Euro.

The Euro-Zone has backed away from the brink of collapse – for now. The recession that’s gripped the region since the 2Q’12 appears to be abating, with the contraction appeared to having bottomed in the first half of 2013.

Euro 10 yr bond spreads

The rebound, in its entirety, can be attributed to the European Central Bank’s efforts to reduce financial risk in the region in the summer of 2012, when it announced its outright monetary transactions (OMT) program, essentially an unlimited safety net for Euro-Zone countries facing high borrowing costs in trading markets.

Euro GDP

The Euro, with the tail-risk premium of a break up very-much diminished, has sparkled amid the turn in growth prospects. After bottoming just above $1.2000 against the US Dollar in July 2012, the Euro has spent much of 2013 trading above $1.3000, trading as high as $1.3832 on October 25. The resiliency of the Euro is commendable two-fold: first, not only due to warding off breakup threats; but also because the US yields have risen sharply thanks to the Fed’s upcoming reduction in QE3.

Euro PMI

The rebound in regional economic activity, of course underpinned by stability in peripheral bond markets, may continue through the remainder of 2013 and into early-2014, if incoming PMI data is accurate. In fact, the last time we discussed the Euro-Zone crisis, manufacturing and services PMI figures from across the region were struggling below 50, the demarcation between growth and contraction.

In February 2012, only German PMI Services showed growth, while the other seven gauges tracked (manufacturing and services for Germany, the Euro-Zone, France, and Italy, each) were contracting. Indeed, our last commentary was near the “bottom”; and now five of the eight PMI readings are in growth territory (see chart above). Further sustained signs of economic progress in the region will only further serve as a bullish catalyst for the Euro.

Going forward, political risk is what could undermine the Euro. Corruption in Spain and Italy threatens the governments (the latter especially), while record or near-record high unemployment rates across the Euro-Zone will only serve as a constant reminder as to how far the region needs to go before “recovery” can be declared. Depending on what the Fed does over the 4Q’13 – will it taper? by how much? in what increments? – the EURUSD is positioned for the time being to finish the year above $1.3300 so long as political pressures remain subdued and further signs of European ‘green shoots’ emerge.

Emerging Markets Meltdown: Is Another Asian Crisis Brewing?

Concerns over a 1997-redux are brewing. The parallels are staggering. Asia is facing growth pressure. Emerging markets are going belly up. Currencies are rapidly deteriorating as the Federal Reserve considers monetary tightening. Japan is on the verge of fiscal tightening. These are all the same ingredients that led to the 1997 Asian crisis. Are we looking over the edge, or is there hope to avoid another financial crisis?

First, a look at emerging market currencies: they’ve been hammered in 2013 far too similar to the pain seen in 2008. The Indian Rupee hit its lowest exchange rate ever against the U.S. Dollar in the 3Q’13; the Indonesian Rupiah is halfway back to its lows; the Brazilian Real is a few percent away from its lows; and the Turkish Lira, burdened further by recent political discord, it at its lowest levels ever.

Emerging market currencies

So much for the “carry trade,” of which all of these currencies are considered.  Why? They have higher yields. They are expressed in the form of the sovereign bonds. It is important to distinguish the difference between “higher yields” and “higher yields.” Stick with us – there’s a clear distinction.

Higher yields are used to refer to two, opposite situations: one in which a country, with more obvious inherent risk (politically, economically, socially), offers a “higher yield” but is considered a worthwhile investment given the optimistic projected path of the economy – economic liberalization, a stable political environment, reduced risk for violence. The aforementioned emerging market economies share these characteristics: optimism for a brighter future.

10 yr gov bond yields

The other type of “higher yield” is when there is panic. There is no optimism for a higher future; higher yields result from investors selling the bonds (bond prices and yields are inversely correlated). This can result from a number of influences – war, higher inflation, political instability – as well as the threat of reduced liquidity. The higher yields we’ve seen in these emerging market economies over the course of 2013 represents the wrong type of higher yield, predicated on exogenous circumstances – the Federal Reserve winding down its stimulus program .

Does this mean that another 1997 Asian crisis is upon us? Possibly, maybe among the BRICS. As the chart to the left shows, international claims to GDP – foreign banks’ lending – is rising at a pace that puts it on par to where the Euro-Zone was three years ago. It also puts the BRICS on par with the Asian financial crisis in 1996/1997. These are concerns that must be monitored considerably in the weeks ahead. Excess volatility will greatly enhance the need to reduce portfolio risk through hedging.

Foreign banks lending

Charts courtesy of the RBA’s August Statement on Monetary Policy.

The End of the Fed’s QE and its Impact on Markets: Part 2

This is the final of two posts on the impact of the end of the Federal Reserve’s quantitative easing (QE) program on markets, and it will focus on the impact on the “carry trade,” of which the New Zealand Dollar is considered. We will examine the outcomes for a reduction in QE3 and how it might impact FX markets.

The end of the Federal Reserve’s QE3 program may be approaching fast. Market participants have become increasingly anxious as to the next direction the world’s most influential central bank will take as it measures the health of the U.S. economy.

In the previous post, we examined how speculation over the Fed’s QE3 “taper” has caused clear misalignment in two key markets: bonds and stocks. This agitation has spread across the globe and has helped provoke the early stages of a Southeast Asia/emerging markets crisis  (covered in future postings), which has done nothing short but wreak havoc on assets deemed “risky.” Similarly, the “carry trade” has suffered as a “risky asset.”

What exactly is the carry trade? Investopedia defines it as:

“A strategy in which an investor sells a certain currency with a relatively low interest rate and uses the funds to purchase a different currency yielding a higher interest rate. A trader using this strategy attempts to capture the difference between the rates, which can often be substantial, depending on the amount of leverage used.”

Returns from carry trade strategies were serial outperformers for over three decades before the global financial crisis of 2008. Data from 1971 to 2005 illustrates this point clearly enough:

Article 2 Table

Not only did the highest yielding currency basket in this case study offer the highest average annual return over this time series, but by theoretically going long basket 6 – the highest yielding basket – while shorting basket 1 – the lowest yielding basket – investors would take in an annual return of 4.35%. Risk is compensated, too: the Long 6/Short 1 basket has the highest Sharpe Ratio among the seven samples.

The carry trade hasn’t been so kind this year. A typical carry pair in the wake of the global financial crisis – the NZDUSD – hasn’t produced the kinds of returns risk-seeking investors would have hoped for. And that’s simply because of the chatter around the Fed’s tapering of QE3. The New Zealand Dollar, as the highest yielding major currency (the Reserve Bank of New Zealand maintains a key rate of 2.50%, the same as the Reserve Bank of Australia now) and member of the commodity bloc, finds itself in the crosses.

It’s clear that concerns about the Fed winding down QE3 has been bad news for the New Zealand Dollar and the carry trade. After peaking above $0.8600 in April, the NZDUSD slid to as low as $0.7727 (on a closing basis) in late-August –  greater than a -10% drop in just over one quarter.

Article 2 Graph

Why has this type of volatility returned? Higher U.S. yields have reduced the interest rate differential between the New Zealand and U.S. Dollars, and considering that once the Fed begins to exit it will be difficult for it to turn back, we can surmise that this instance of the carry trade – the NZDUSD – will struggle to find meaningful direction going forward. At this point, the only hope for any U.S. Dollar-funded carry trades is for a turn lower in U.S. Treasuries yields, and that might not happen if the U.S. economy improves and the Fed proceeds with tapering QE3.

The End of the Fed’s QE and its Impact on Markets: Part 1

This is the first of two posts on the impact of the end of the Federal Reserve’s quantitative easing (QE) program on markets. The recent iteration, QE3, is expected to slow over the next few months. This first article will examine what has happened to U.S. financial instruments and what to expect going forward.

On May 22, 2013, Federal Reserve Chairman Ben Bernanke tapped his microphone in front of a U.S. Congressional testimony and said, “If we see continued improvement and we have confidence that that is going to be sustained, then in the next few meetings, we could take a step down in our pace of purchases.”

With the first hints of ending the Fed’s most recent iteration of QE3 – a combined $85B in monthly asset purchases ($40B in agency mortgage-backed securities, $45B in outright U.S. Treasuries purchases) – a tectonic shift in global markets began. As is often the case, bond markets have led the way ever since late-May.

US Economy Improves

The blue area on the above chart highlights the performance of the S&P 500 and the U.S. Treasury 10-year note yield between May 22 (when Fed Chairman Bernanke first warned about “tapering”) and June 19 (when the Federal Reserve’s official policy statement suggested that a reduction in QE3 could occur at some point over the next several months.

The area highlighted is important because it frames the QE3 taper conversation in context of a strengthening US economy. After mid-June, US economic data started to disappoint. Ironically, this has been due to…higher yields (interest rates).

Indeed, a stronger U.S. economy prompted the Fed to look to wind down QE3, pushing up yields, which in turn caused the economy to slow down during the summer. Likewise concerns that the Fed has begun to see certain asset classes as too ‘bubbly’ – bonds in particular after the Fed has added over $3 trillion to its balance sheet over the past five years – exacerbated rising yields.

This remains a logical reaction: the largest buyer of U.S. Treasuries the past five years is suggesting that it will reduce its uptake; demand will fall and price will too as a result. Market participants have been simply front-running the Fed by selling their U.S. Treasuries holdings ahead of any official announcement.

Outside of the shaded area on the chart, there is an observable pattern: even as the S&P 500 has scrapped its way back towards all-time highs, it struggles mightily when U.S. yields move higher. Only when U.S. yields have consolidated over several days or weeks since early-July – in particular the U.S. Treasury 10-year note yield as seen on the chart – has the S&P 500 been able to advance. (This link will remain true, even if the Fed chooses not to taper; lower yields will boost stock prices.)

The consequences of the Fed’s plans to reduce QE3 have serious implications for financial markets across the world, not just in the United States. Indeed, other asset classes’ own barometers of risk – in FX markets, the “carry trade” such as the NZDJPY or NZDUSD pairs – are showing signs of increased instability.

The next post on the end of the Federal Reserve’s QE3 will focus on the impact on the “carry trade,” which the New Zealand Dollar finds itself in the crosshairs. We will examine the outcomes for a reduction in QE3 and how it might impact FX markets.

Australia’s Reliance on China Puts Aussie at Risk

The Reserve Bank of Australia cut its key benchmark interest rate to 2.75% at its policy meeting in May, underscoring the fragility of the Australian economy as it remains heavily reliant on emerging market growth for support.

Now, with rates at all-time lows, it’s a good moment to reflect on why we’re in the current predicament. After all, dovish monetary policy is only implemented when worries of an economic slowdown persist. The RBA has been cutting rates furiously since November 2011, when its main rate was 4.75%. Yet despite these efforts, the following chart raises two major concerns for Australia.

Article 8a

Over the past two years, after the AUDUSD peak near $1.1100 in the summer of 2011, the RBA began an aggressive easing cycle that continues today. Yet over this time, the AUDUSD (yellow line) has remained relatively stable – in the past twelve months, it has traded in a roughly 5% band, between 1.0100 and 1.0600.

What hasn’t remained stable has been Australia’s unemployment rate, which has shot up six-tenths of point over the same time frame. Despite several rate cuts the past few years, Australia’s unemployment rate has increased from 4.9% in April 2011 to 5.6% in March 2013, the highest rate since November 2009.

While volatile labor market readings the past several months have unnerved policy officials, such activity is likely to continue as the mining sector peaks, which according to the RBA and government officials should be this year. That’s why the chart above is concerning: the RBA has already done a great deal to help insulate the economy from a slowing China (discussed in the previous post) and yet the labor market is still suffering.

The other concern raised about the Australian Dollar is the fact that it is one of the few major currencies that offers any semblance of yield. With risk appetite buoyant in recent months, this “reaching for yield,” as Fed Chairman Ben Bernanke has described it, has pushed up the prices of Australian (and New Zealand) sovereign debt.

Article 8a

This perspective feeds back into the discussion from an earlier post on “currency wars.” Investor decisions are being altered because of non-standard monetary policies across the globe, forcing secondary policymakers and consumers (like those in Australia and New Zealand) to change their behavior.

To combat the flow into the Aussie and Australian debt, the RBA recently suggested that the high exchange rate of the Australian Dollar has become problematic: the Aussie “has been little changed at a historically high level over the past 18 months, which is unusual given the decline in export prices and interest rates.” Just like the RBNZ, the RBA is being forced to engage in a loose form of competitive devaluation by repeatedly cutting rates and talking down the exchange rate of its currency.



Year of the Snake: Not the year for strong Chinese growth

As China gets ready to overtake the United States as the world’s largest economy during the middle of the current decade, leaders have had to lead a tricky transition from a centrally-planned state to a free market. A major part of that task is to fill out the middle class that would support a consumption-based economy. But with base metal prices falling and the commodity currencies losing value in recent weeks, concerns over the Chinese growth picture have been stirred.

There’s one major caveat to Chinese data that is truly inapplicable to any other global economic force: you just don’t know if you can trust it. Chinese data seemingly comes out of a black box, where Chinese government readings of the economy tend to outpace private sector readings, or even eclipse foreign government estimates of economic activity.

One recent prominent example of this manipulation emerged in early-May when Chinese trade data showed an incongruent jump in exports despite declining orders to both Europe and the United States, China’s two largest markets. This discrepancy isn’t just our observation. According to researcher IHS Inc. via Sprott Group, “an “astounding” +92.9% jump in exports to Hong Kong, the most in 18 years, raises questions on data quality.”

Putting away our tinfoil hats for a moment, even if there’s no misinformation afoot, Chinese growth is slowing down. Presently, there are no indications from Chinese policymakers that they will try and stimulate their way out of this spell of moderation. Given recent rhetoric, it’s very unlikely that any such measures are taken at all, now or over the rest of 2013.

Article 7

The days of “ultra-high speed” growth were in the past, Chinese President Xi Jinping said in early-April. Similar sentiment was promoted by Prime Minister Li Keqiang, who has said that China may have to accept annual growth rates below +7.0% in the coming years. Recent gauges of manufacturing activity suggest that 2Q’13 growth might edge lower towards +7.5% annualized. The HSBC services PMI index fell to 51.1 in April from 54.3 in March, suggesting that the slowdown is not just limited to the manufacturing sector. If there’s one indicator that may confirm these views, it is the Chinese Consumer Price Index.

The chart above illustrates the annualized Chinese inflation rate (yellow) against annualized Chinese GDP (white). The slowdown in Chinese growth accelerated in mid-2011 once price pressures started to fall, a sign that overall demand in the economy was weakening. Now, inflation has fallen by around four percent, tracking GDP’s diminished rate of +7.7% annualized from near +10.0% just two years earlier.

While it appears that the market and policymakers are going to push Chinese growth lower, the ripples these waves will create will be exceptionally important for the global economy. Already, signs of slowing Chinese growth have negatively impacted the Australian economy, where policymakers cut the main rate to a record low 2.75% in May.

The reasons behind the Reserve Bank of Australia’s rate cut are critically important, and are why we believe that, thanks to China, the Australian Dollar could suffer in mid-2013.

Roots of the Spreading Currency War: Part 2

Quantitative easing (QE) became the preferred non-standard policy tool among central bankers starting in 2007 as more and more large central banks reached the zero interest rate policy bound and were forced to become more creative. Regardless of where you stand on the issue, it goes without saying that without the implementation of QE, the global economy would still be in tatters. 

Over the past several years, the Fed hasn’t been alone in its efforts to weaken its currency to help domestic exporters. For example, the Bank of England has expanded its monetary base by five times since 2008; the Swiss National Bank implemented a currency floor for the Swiss Franc against the Euro to stabilize trade.

In 2013, the most notable offender has been the Bank of Japan, who in an effort to pull the country out of a two decade long deflationary spiral (Japan has been (in)famously mired in a more-than-two decades long deflation spiral) has pulled the rug from under the Yen quite literally. From January 1, 2008 to November 14, 2012, the Yen had rallied by +43.21% against the British Pound; +38.14% against the Euro; and +28.97% against the US Dollar. Since mid-November, when it became clear that Shinzo Abe would rise to power as prime minister, the Yen has been ‘competitively devalued’: it lost -20.42% to the British Pound; -26.69% to the Euro; and -23.52% against the U.S. Dollar.

Article 6

Clearly there is a distortive effect by ultra-easing policies on FX markets. The effects are not limited, however, as investors’ risk tolerance is completely altered. Consider the performance of the U.S. equity market the S&P 500 (yellow) compared to the size of the Federal Reserve’s balance sheet ($M) (white). The rally in U.S. equities – the benchmark for high-grade risky assets – can be wholly attributed to the rising Fed’s balance sheet, as the chart above implies.

Now that the BoJ has engaged in QE, the Nikkei 225 stock index is soaring, up +32% in 2013 thus far. With the BoJ’s QE plans in place for at least the next two years, investors will continue to jettison Yen-denominated assets in search of yield. But this brings us back to the earlier point about trade: the weaker Yen means that major trading partners, such as the United States, the Euro-zone, and Australia and New Zealand, will have to enact counter measures to prevent their domestic exporters from bearing the pain.

On several occasions early in the year RBNZ Governor Wheeler commented that the elevated New Zealand Dollar exchange rate was hurting the nation’s manufacturers, while noting his desire to “smooth the peaks” in the high yielding currency. These efforts have been minor thus far, and yet the New Zealand Dollar is barely dislodged. There’s little reason to think the RBNZ is going to be able to turn the tides anytime soon.

If there is one thing we can expect with a fair degree of certitude, it’s that competitive devaluations are here to stay for the next several years. The Fed is doing it, the BoJ is doing it, and as time passes, more and more central banks will be forced to engage in ultra-easy monetary policy.