At this point in time we know already what happened in Japan during the past trading session reason why I would like to point out another interesting event in my opinion:
Indonesia’s central bank unexpectedly raised its key interest rate for the first time since 2011 as Governor Agus Martowardojo accelerates efforts to boost confidence in the currency and cool inflation expectations. Bank Indonesia policy makers increased the reference rate by a quarter of a percentage point to 6 percent, after the central bank this week raised the rate it pays lenders on overnight deposits and said it’s ready to buy government bonds from the secondary market to support the weakening rupiah.
Thus Indonesia joins Brazil in addressing an outflow of capital as concerns mount that developed nations will scale back the liquidity they have been pumping.
In the meantime the Philippine stock market was one of the ugliest in the huge selloff across Asia, as foreign funds continued to exit following signs of cooling growth in emerging markets.
This all remembers me the “Great Escape”: if I was going to find a reason for the move I would find it in Israel’s Fisher words:
The temptation for central banks to engage in competitive devaluation is fading as rising Treasury yields diminish the allure of assets in emerging markets.
We need to remember that to moderate the strengthening of the shekel the Bank of Israel last month cut interest rate twice by a cumulative 0.5 percentage point to 1.25 percent and announced the purchase of $2.1 billion in foreign currency by the year’s end.
So we got the World divided in three parts:
- One part trying to boost its currency and cool inflation expectations
- One part using monetary policy to devalue their currencies and fuel exports
- And another part defending its “status quo” using currency bands
That’s the actual picture; if you want to extinguish the fire you need to find where it all started, so let’s find out:
It’s easily seen that the spark was the rising US treasury yields, which proof Fisher’s words. Therefore we got the following cycle:
According to this diagram the Fed “wording” is the driving force behind the US Treasury Yield, which ultimately is the spark that initiated the fire across financial markets that will drive the Fed policy decision.
Thus, being the Fed market friendly: an orderly decline will increase the chance of an earlier tapering, while a disorderly decline will cause the Fed to shrink from acting.
Will the market prove my assumption or is it just a Pindaric flight?