Negative Rates and Inflation: Economists v Traders
With only a handful of data releases in this Easter shortened trading week, I wanted to take a step back to consider the effect that negative interest rates have on inflation, and then how that could affect Forex markets heading forward.
This was a topic that the Fed’s James Bullard spoke about last Friday and that I wanted to go into more detail on.
So, remember how you’re a Forex trader now and you should forget any conventional economics theory that you’ve learned along the way because markets are crazy, irrational beasts? Well how about this one from Bullard on Friday:
“The continuing ZIRP in the G-7, far from putting dangerous upward pressure on inflation, may be leading us to an outcome with low nominal interest rates and low inflation that can last for a very long time.”
Wait, what?? Isn’t the whole idea of easing monetary policy and the desperate measure of negative rates where you’re essentially charging to save, to encourage spending? Spending which would eventually put upward pressure on inflation?
“This contrasts sharply with conventional wisdom and central bank rhetoric, including much of my own, which emphasises that ZIRP is putting upward pressure on inflation and offers the best hope for returning inflation to target.”
Ah yes James, thank you.
The problem here lies in that the future under long term low interest rates (let alone negative rates) is really a great unknown. If consumers think that something will be cheaper in the future, then they aren’t going to spend now. This seems to be what is happening and is causing some big (bald) head scratching in central bank policy meetings around the world.
Forex trading is not economic theory. Remember that it’s not about being right or wrong, it’s about how much money you make.
Chart of the Day:
With the first major market moving event of the week on the forex calendar coming tomorrow as the RBA Governor Glenn Stevens delivers a speech to the ASIC annual forum, we take a look at the Aussie Dollar as today’s chart of the day.
Keeping it clear and simple today, price is moving along nicely upward within a bullish channel. But how much further will it likely run?
The negative interest rate issue we spoke about above is driving the higher yielding Aussie higher whether the RBA like it or not. Any jawboning, like what we’ve seen from Debelle calling for 60c, is likely to be just a short term fix which gives opportunity for the bulls to soak up more orders at better prices.
There have been a few headlines floating around today calling the top in the Aussie but as traders, the bigger risk heading into and beyond this week’s speech is definitely to the upside.
On the Calendar Monday:
JPY Bank Holiday
“Japanese banks will be closed in observance of Vernal Equinox Day.”
Dane Williams – @VantageFX
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