The currency market will react to the USD/JPY Index that contains the Payrolls Payroll data and bearish press regarding the USD and the Yen when the index tracks Payroll data. It may be that investors are overreacting to the Japanese yen devaluation, but this doesn’t mean that they’re wrong.
Zero Hedge reports that some people speculate that the central banks of Japan and the United States will be forced to implement negative interest rates to clear up their balance sheets in order to fend off inflation. In response, the Bank of Japan will also need to engage in fiscal stimulus, as they will be unable to continue to pay interest to bondholders if the economy starts to decelerate.
While these analysts believe that the data points indicate that this could happen, they do not predict exactly when it will happen. On the other hand, there are a number of institutions that believe that this could actually occur within a year or two.
In their report, Zero Hedge says that it is too early to say that the central banks in Japan and the United States will decide to eliminate their quantitative easing programs. They will continue to purchase large amounts of assets, which will inevitably cause inflation and encourage capital flight.
The Zero Hedge does believe that the US Federal Reserve may raise interest rates later this year. Their belief is that the raising of interest rates would alleviate pressures on their balance sheet.
The Zero Hedge believes that the US dollar will rise to $1200 before the end of the year. That is based on the fact that the economists in the economic data network in New York recently published their second quarter of economic data and it shows the decline in consumer spending.
The Zero Hedge says that consumer spending in the United States is falling short of expectations because consumers are not able to afford to spend on new things. This is the main reason that economists are constantly afraid that deflation will begin to set in and lead to financial disaster.
They believe that the Obama administration needs to end the quantitative easing and strengthen the US monetary policy. By doing so, this will free up money so that it can flow freely in and out of the American economy.
The Zero Hedge says that the US government’s fiscal stimulus plan is inadequate and that it is too early to discuss the possibility of debt restructuring. Instead, they will likely increase the level of the debt ceiling, which will lead to a realignment of fiscal policy.
As soon as the Administration announces that it will not use any more quantitative easing, bond prices will begin to tumble. This means that the US dollar is going to rise sharply and will add to demand for liquidity.
Zero Hedge says that if this happens, the dollar will rise to $1200 which will create a liquidity crunch. The Federal Reserve will come under pressure to either lower interest rates or use more fiscal stimulus.
The Zero Hedge sees more news about the growing global liquidity crisis. Once the markets realize that the US Federal Reserve is moving away from quantitative easing, they will start to rally, and the dollar will follow suit.