The ongoing QE programs of the Federal Reserve are having less and less impact on the real US economy, and the decline in the velocity of money does not go hand in hand with a sustained expansion, says Kristian Kerr of DailyFX.
In the interview below, Kerr also discusses the relative strength of the euro, the currencies which could benefit from Japan’s policies and other topics moving currencies.
Kristian Kerr re-joined FXCM in February of 2013 as a Senior Strategist focusing on the macroeconomic and technical factors impacting the foreign exchange markets. Prior to his return to FXCM, Kristian worked for 7 years at FX Concepts, one of the world’s largest currency focused hedge funds, as both a discretionary trader and research analyst. He has also held various roles at Informa Global Markets, Bank of America and CIBC.
1. Recent US data fell short of expectations. At this stage, can already say that the US is back to frustratingly slow grow or could it still be a one-off dip?
I remain less than enthusiastic on the US economy. The Fed’s “extraordinary” policies are clearly having less and less impact on the real economy. I am particularly concerned with the continued decline in the velocity of money. Sustained expansions do not occur while money velocity is in decline.
2. The euro-zone is in a difficult economic situation and has unresolved issues, but the currency remains relatively stable. What forces support the euro?
ECB policy is not that aggressive when compared with those of the Federal Reserve and the Bank of Japan. As long as the Europeans maintain this relative conservative tack the euro should remain somewhat stable. The real question for me is whether the markets will let them go on with this approach for very much longer?
3. The BOJ decision undoubtedly weakened the yen. Which currencies are set to gain as more money leaves Japan?
The Bank of Japan has reignited the global race for yields. Currencies with higher relative yields have been the primary beneficiaries. Emerging market currencies like MXN, PLN, TRY, ZAR, THB and MYR have been particular standouts.
4. Canada’s jobs report was a big disappointment, after an excellent month beforehand. Where is the Canadian economy heading?
I liken the Canadian economy to that of the United States in the mid-2000s. The property bubble is slowly becoming recognized as a problem. In my view there is too much complacency. Fallout from this could be a major drag for years to come. The next few months should shed some light on the situation as it is traditionally an important time for Canadian real estate.
5. Australia and China are moving towards a currency deal to trade directly between the Australian dollar and the Chinese yuan. Can this move strengthen the Aussie?
Other Chinese currency deals with Russia and Brazil were taken as positives for the Ruble and the Real. I would expect the markets to view such a deal with Australia as an initial positive as well assuming it has not already been priced in.