The Return of “Influence”

Central Bankers Starting to flex

If last week taught us anything it was a reminder that Central Banks still exert a major influence over markers when they choose to do so.

Since the financial crisis and the Bank’s efforts to ensure that there was lasting no global recession, they have allowed markets to find their own level. This was probably the wisest thing to do and was most likely agreed by them all. The subtle manipulation of FX levels was considered to be of secondary importance.

It is a trait of the U.S. Treasury and Federal Reserve that they get twitchy when not influencing markets as was seen in the days of Greenspan, Bernanke, Summers, O’Neill and Paulson, they like to dabble, just a little.

During Geithner and Yellen’s time, markets were left to their own devices but that isn’t the Trump way either so the new Powell/Mnuchin administration has decided that markets need guidance and that has been delivered and strengthened the dollar which was Trump’s wish if not Mnuchin’s

The Bank of England tried to make the markets think that they were about to hike rates again despite the dovish hike last November was considered to be the last “for a while”. The hedge fund industry won’t have thanked Mark Carney as his subsequent denial sent the pound tumbling when the “hedgers” had built significant long positions. The Moral? Do your own analysis guys!

The ECB has proven to be wily, managing to lower the currency to encourage exports without incurring the wrath of the “manipulation police”.  

Bitcoin market already mature?

One of the reasons that Bitcoin rallied as it did last year was that it was considered a “frontier market” where large profits and losses could be made trading off factors that didn't exist as the market “matured”.

Since the rapid rise then equally rapid decline, the entire market has, for me, changed. The speculative element has been shaken out leaving those who believe in Bitcoin as an alternative exchange of value remaining as holders of the coins.

However, longer term what will the effect be of inflation on cryptocurrencies like Bitcoin? Will there be a further flight when after holding a coin which barely fluctuates (when compared to its recent past) actually costs money? Obviously, that is what happens when you hold a high yielder too, but the differential is made up in the interest rate differential. It is the very antithesis of the carry trade (the non-carry trade).

The pace at which the entire industry has grown has overtaken the tradability of bitcoin. Yes, there are plenty who want to trade it but the “real entrepreneurs” want it to become an alternative not a toy or plaything to be passed from player to player.

In the growth of the cryptocurrency world, Bitcoin has reached a certain level of maturity in that there is no real innovation to take place, it is more tweaking of what is already developed. That should mean that liquidity grows, volatility falls, and it is able to fulfil the purpose for which it is designed. But, will that bring speculators back? Possibly but it will need a sea change or giant leap forward in acceptability before puberty is finally attained.

Sterling still has a long way to go.

Parity is a word, like stagflation, that we all talk about but virtually no one has seen. Not quite as rare as the Loch Ness Monster or Bigfoot but rare enough. It is the FX equivalent of the Halloween mask from Scream, scary but unlikely.

Well that may not always be the case. The pound has two chances to see parity and may even see stagflation if the economy continues as it is.

Brexit!

Yes, that word again. Is the UK heading for a hard, or no deal Brexit? If the past two years are anything to go by, that looks to be becoming a real possibility.

Since two years have gone by and the main political parties haven’t even decided on their internal policies, just how the Government can cobble together a cogent set of proposals for Brussels is hard to imagine. And with Parliament unable to pass a law making “upskirting” illegal, what chance does Brexit have?

We could see parity versus the dollar, we could see parity versus the common currency. The latter is unlikely given the headwinds that the Eurozone faces but if Brexit talks really do bring no agreement and the Fed continues to raise rates at the same pace (imagine if the U.S. really does see an uptick in inflation) the 1.00 could be on the cards.