``The basic cause of inflation, always and everywhere, lies in the field of money and credit." -Henry Hazlitt in Newsweek, December 22, 1947
The US Federal Reserve did the unexpected this week, aside from conducting a preliminary test to unwind current stimulus by selling $180 million of reverse repurchases Friday (Wall Street Journal), the Fed’s balance sheet recorded sales of $2.7 billion in Mortgage Backed Securities (MBS) which is the first decline in the Fed’s MBS holdings since the Quantitative Easing program begun. Incidentally, since MBS represent as the “toxic” securities, it would seem improbable for anyone to actually buy them.
Figure 1: stockcharts.com: An Anomalous Response To A US dollar Spike
Nevertheless, the Fed actions has apparently coincided with the spike in the US dollar index (see figure 1) which media attributes to improving economic jobs (marketwatch) and factory orders (Wall Street Journal) data.
To add, recent concerns over the strengthening yen [as discussed in Vietnam’s Inflation Control Measures And The Japanese Yen’s Record High], has prompted Japanese officials to deploy their own version of quantitative easing with the excuse to fight “deflation” by having the Bank of Japan (BOJ) inject one trillion ($11.5 billion) into money markets and likewise introduce a 10 trillion yen facility for banks-equivalent to 2% of GDP. The BOJ would accept everything from government bonds to corporate bonds as collateral (Wall Street Journal).
The Japanese Yen which constitutes about 13.6% of the US dollar index pie, second only to the Euro (57.6%) in terms of weighting, fell by 4.18% over the week. The Euro fell by only .71% which means the chunk of the US dollar’s gains came from the Yen’s fall.
Meanwhile, Japan’s equity benchmarks celebrated on the announced QE program, the Nikkei rocketed by 10.36% while the Topix index soared 9.69%.
In short, central bank actions of Japan and the US has prompted for the heightened volatility in the price movements of US dollar index. And one may even suspect that the combined actions may have been deliberately calibrated for unspecified reasons.
Yet, in contrast to the conventional inverse relationship between the US dollar (USD) and stocks (SPX), where a rising US dollar impacted equities negatively and vice versa, the actions last week saw an anomalous synchronism. Only gold (GOLD) and oil appears as having been negatively affected. Even copper (COPPER) shrugged off the surge in the US dollar.
This implies two things: One that the US dollar’s rise has merely been a knee jerk response to the recent Fed action, which may be deemed as synthetic or a bluff and likewise reflected on Japan’s thrust to devalue its currency. And second, concerns over the US dollar “carry trade” have been vastly exaggerated [see Central Bank Policies: Action Speaks Louder Than Words, The Fallacies of US Dollar Carry Bubble and Jim Rogers Versus Nouriel Roubini On Gold, Commodities And Emerging Market Bubble], as markets didn’t suffer from a chain of losses arising from a strong US dollar.
The coming sessions will reveal if these trends will be sustained.
