Currency Wars

The sci-fi movie, Interstellar, directed by Batman movie-maker Chris Nolan, has an interestingly odd tag line, “The end of the Earth will not be the end of us.” This movie is consulted on by Kip Thorne, one of the world’s leading theoretical physicists, on a fiction storyline based on science concepts like “wormholes” to save mankind by migrating to distant planets. Those notions may still be in distant dreams. In the meantime, Governments and their Central Banks across the world are struggling to propel their economies on the right course and waging currency wars. However, the U.S. economy seems to be showing good health and there is no end in sight for the U.S. stock market rally, which got another boost from declining oil prices and monetary easing overseas. The S&P 500 advanced 1.2 percent last week as data signaled that the U.S. economy is improving. The benchmark gauge has rebounded 11 percent from a six-month low last month.

The economic news from the U.S. is stellar. That’s not so much the case at the moment for economies around the world The European Central Bank and China’s Central Bank are both making moves to try to help spur their economies into more inflation and faster growth. Meanwhile, the Fed is at the other end of the spectrum, and after exiting stimulus, they are preparing to raise interest rates at some point next year. Economic activity and inflation will be the determining factor in terms of the Fed’s timing, and a lot will depend upon the amount of drag the world exerts on the U.S. This may be quite a challenge as Europe and Japan are still struggling to avoid the “Blackhole” of deflation.

The U.S. dollar is on a rampage this year, just like US stocks, rising against all major currencies. This currency war seems to be getting intense and deliberate. When economic growth becomes weak, governments try to grow exports and contain imports. The easier way to achieve this objective is to devalue their currency. The European Central Bank wants to depress the value of the euro while Japan is busy making the Yen cheaper relative to other currencies. Now, after the Yen has devalued by almost 50% in the last two years to the Yuan and the Dollar, China has made the first move. While China’s export-centric economy is more predisposed to currency competition, the composition has pivoted towards a U.S. consumption-based system in recent years. This raises the question as to how much time before the detractive forces of the strongdollar will get a policy response from the U.S.?

Good news for Thanksgiving travelers and holiday shoppers! Cheaper crude is a boon for the U.S. economy, with U.S. drivers saving about $250 million a day on gasoline compared with mid-June, according to AAA. This leaves consumers with money to spend on other items, especially as “Black Friday” nears. The national average retail gasoline price is $2.84 a gallon. The price fell below $3 a gallon this month for the first time since 2010. For context, after peaking at $103.66 in late-June, crude oil has steadily declined and has traded as low as $73.25 in mid-November – a drop of more than 29% in just five months. The implications for headline inflation via falling energy costs are relatively straightforward, but the connection to the broader health of the economy is still to be observed.

A holiday-shortened week is on tap for this week, but there will be some data to drive the markets before the break. We get third-quarter GDP on Tuesday, and Durable Goods Orders, Consumer Confidence and Sentiment, New Home Sales, all on Wednesday. Meanwhile, enjoy your Thanksgiving holiday and good luck with shopping ahead.

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