Wednesday, November 19, 2014

yen and euro

Here are monthly bar charts of the Japanese yen (top) and the Euro (bottom).

Japan and the euro-zone are the two arenas where central banks (the BOJ and the ECB) are battling declining nominal gross domestic product by pursuing policies of quantitative easing. These policies, if implemented with determination and persistence, will increase growth rates of nominal gross domestic product (GDP) by raising asset prices, depreciating the domestic currency, and encouraging investment. The increase in asset prices will be world-wide and not simply domestic since these are two of the world's biggest economies. So these QE policies have positive implications for the US stock market too.

The Bank of Japan is aggressively pursuing a QE policy and I expect this will continue until Japan's nominal GDP shows a pattern of strong growth. As long as the BOJ sticks with its QE policy the trend in Japanese stock prices will be upward and the trend in the yen downward. I think the yen will probably drop into the 68-70 zone (top chart). This would correspond to a dollar-yen level of about 1.45 versus the current 1.17.

In Europe the ECB's QE policy currently is mostly verbal posturing. but I think the European economies will so underperform expectations that Germany will panic and loosen the reins holding back the ECB. This may first require a further drop in European stock prices below their October lows. But when all is said and done I think the Euro will plunge below the 1.16-1.20 zone encompassing the lows of the past eight years and continue down to 0.82, the level of the 2000 low 14 years ago.

Of course, should either or both of these central banks halt their QE policies before they attain the desired results their respective currencies will reverse course and head upward. Indeed I think we can monitor the central banks' determination to stick with QE policies by seeing if the downtrend in currency prices continues. I think it will but I try not to underestimate the difficulty of pursuing sensible monetary policy, difficulty the 1929-1932 world depression exemplifies.


tooearly said...

never took you for a Keynsian...

Carl Futia said...

what a strange comment. In what sense does this post convey Keynesian views?

AristotelCostel said...

I suppose tooearly replied to your view on QE effects.

I'm the old silver hater you laughed at long time ago. :) Unfortunately for tooearly, this time I fully agree with your predictions.