This is a post from ex hedge fund trader & senior analyst Fotis Papatheofanous, originally posted in the members area of our www.forexmentorpro.com membership site: Hello my friends! You must have heard it all over the news, the last couple of days, that the FED finally “tapered” its QE program.
I am not going to discuss this further since you can find articles and information about it everywhere on the web but instead I will show you behind the scenes deals and what led to this decision, why taper now instead of March & what to expect re the $USA in the New Year?
One of the reasons was the US-budget deal getting done on Capitol Hill, that actually increases spending by $32-billion per year, and removed lots of reason for the Fed to delay tapering QE for awhile longer. Recall that one of the thoughts that led economists not to expect the taper to begin before March was the idea that the US-economy might be interrupted by the ongoing games being played by lawmakers in Washington. But with a deal virtually done, the way was opened for a taper in the December’s meeting which actually happened.
Some journalists are already referring to him as the “Shadow” FED chief since Janet Yellen is considered ultra “dovish” and unqualified.
Fisher is one of the world’s top macro-economists with an impressive resume.
According to the WSJ, “Mr. Fischer is a former professor at the Massachusetts Institute of Technology and former top official at the International Monetary Fund. His former students include Fed chief Ben Bernanke, European Central Bank chief Mario Draghi, and Lawrence Summers, the former head of Mr. Obama’s National Economic Council.”
In addition, Mr. Fischer has loads of experience in dealing with financial crises. As the managing deputy director at the IMF, Fischer, engineered the rescue of Mexico from the Tequilla crisis in 1994, arranged the bailouts of Korea, Thailand, Malaysia, and Indonesia during the 1997-98 Asian debt crisis, helped craft a loan agreement between Western bankers and Moscow, after Russia’s debt default in 1999, and helped to put out the fires after the collapse of the Argentine peso and Brazilian real in 2000-01. And for the past eight years, Fischer served as a governor of the Bank of Israel, guiding the $190-billion economy through the 2008 financial crisis nearly unscathed.
Now, you might ask how this is important for financial markets. Why do we care about Fischer being the next Vice Chairman behind Yellen?
Because this is the guy that will do all the dirty work!
Expect a gradual change in the FED’s policies and also in the way they communicate with the public. Fischer doesn’t like to give signals as to what the FED will do next. In an interview he said about QE that it was “Dangerous but necessary”. I expect the FED in 2014 to remain accommodative but it is obvious that they want to get out of the QE. The bubble must burst!
Let’s have a look now at the Yen.
On Dec 9th Tokyo slashed its estimate of economic growth for the July-September quarter as investment by companies slowed more than first estimated.
The world’s third-largest economy grew at a +1.1% annualized rate in Q’3, less than half the +3.8% pace of the April-June quarter. Japan’s economy is slowing down sharply from a +4.3% pace in the first quarter. The government’s revival strategy for Japan centers on cheap credit, a weak yen and longer-term reforms to boost competitiveness, but corporate investment and personal incomes have yet to rebound.
Meanwhile, exports have grown less than expected despite the weaker yen, partly due to slowing growth in many emerging economies.
The BoJ’s overnight loan rate is pegged at just 0.1%, and yet Japanese banks are holding ¥91-trillion of excess reserves at the central bank. Bank loans were just +2.2% higher in November compared with a year earlier, and much of the lending has been to foreign hedge funds, seeking to profit from the yen’s slide against the Euro and US-dollar.
The effects on the EURJPY pair are tremendous!
Over the past 1-½ years, the Euro has soared against the Yen, up sharply from a 10-year low of ¥95, set in Q’2 of 2012. During this period, the BoJ has expanded its monetary base by roughly ¥70-trillion, in a determined effort to crush the value of the yen compared to other currencies.
At the same time, the ECB has largely refrained from using its power to print money (QE) and increase the Euro M3 money supply by purchasing sovereign bonds. The ECB’s balance sheet has shrunk rapidly over the past 15-months as banks repay their ECB loans, whereas the balance sheets of the Fed and Bank of Japan have risen.
As long as the ECB refrains from unleashing negative interest rates or engaging in QE, the Euro can continue to trend higher in the months ahead towards 145-yen. A stronger EURJPY would create big headaches for Euro-zone exporters.
We will provide further analysis after the Christmas Holidays when liquidity and volatility return to normal levels.
With Stanley Fischer being a foreigner AND Israeli his appointment is likely to ruffle a lot of feathers and unleash criticism from within the USA as well as from abroad. Here is one such interviewee’s take on the decision; That Fischers policies will be in violation if US law:
Have a great Christmas and a prosperous New Year!