Spoilt by Choice

Market interconnectivity proving difficult to master

Over the past week I have read an incredible number of articles, comments and blogs that miss the point completely about how interconnected the FX market. One of the first things that should be realized by anyone who wants to trade FX that is an asset class in its own right but it is also the lubricant for every other asset class and will react to influences in occasionally unexpected ways.

One such instance has been the “return of yield” as a factor in market movement. The concern over the ballooning of the U.S. budget deficit to over one trillion dollars in 2019 has caught less experienced traders off guard. Indeed, there were several commentators scrabbling around to make sense of what is going on.

While Central Banks (more about them below) have remained on the sidelines unwilling to meddle with their “low rate” handiwork, a whole generation of traders have learned to ignore them. Debt hasn’t been an issue as the recovery has begun and interest rates start to rise. Over the next year or so as an expectation of a return to normality returns to markets the question will need to be asked, but more importantly answered “what will normal look like in 2018/19 and will it bear any resemblance to normal pre-crisis?

Central Banks in danger of falling behind the times.

Over the past ten years or so, inflation has barely been an issue for any of the G7 economies or indeed in the wider global economy. The “prophets of doom” who told us how inflation was going to rise up and destroy the world if interest rates remained too low for too long have been proven to be wrong and the world has something of a new order.

Like everything in economics, inflation is a relative term. It is considered as a factor of what it was last month, last quarter or last year. This means there is not really any such thing as high inflation or low inflation just higher or lower than last time it was measured. Central Banks are having to play catch up both with the upturn in economic activity but also what their role is in the new economic order.

The efficiencies that have been wrought by the changing economic climate are most clearly illustrated by the Eurozone.  The ECB is in any event, and no matter what had happened over the past ten years, in a unique position. There is no reference book to provide an answer on how to deal with nineteen disparate economies, each with its own central bank and fiscal policy, trying to trade their way out of recession in the face of a currency that has risen by 20% in a year.

Another week, another victory

It is difficult to explain what the end game is for cryptocurrency since by its very nature the whole subject is disparate. It is glib and simplistic to say it can be whatever anyone who chooses to be involved wants it to be. That having been said there are two very two very distinct paths being furrowed; the acceptability of Bitcoin (and other coins) in general everyday life and the use of ICO’s in funding (primarily) start up tech businesses.

This week’s announcement by Sweden that it is considering being the world’s first “two currency state” has brought a small victory to those looking for acceptance. It is just a consideration and is born out concerns over the stability of the Kroner payments system unless there is some “official” investigation at least shows that no one is pushing the issue under the carpet any more.

The House Finance Committee in the UK Parliament has also commissioned a study into cryptocurrencies, their use and control.

It is encouraging that every week there seems to be a small step forward in the acceptance of cryptocurrency. Clearly there is a long way to go but the more conversations take place the more lingering concerns can be addressed.