Forex Investment and Currency Trading

There are two debates about the world after the FOMC extraordinary action –

1) is the US turning into a deflationary lost decade like Japan in the 1990s? Or, is it becoming the Weimar Germany of the 1930s?   Deflation vs. Inflation debate rests on the velocity of money – the credit creation mechanism that quantitative easing allows.  The devaluation of the USD has been driven by market players betting that the Quantitative Easing (QE) will bring inflation.  Witness the move up in gold as well. 

2) The decoupling of policy and economics.  Many argue that the US actions are ahead of the curve and that the ECB is now well behind.  So the relative outperformance of the EUR is a reflection of policy tightness – not economic strength.  The stock markets globally didn’t participate overnight in the rally that the FOMC started in US shares – suggesting that there is an element of “beggar-thy-neighbor” doubts to the QE action. 

What is good for the US is being viewed as bad for the rest of the world.  So the zero-rate policy has engendered a zero-sum game theory of markets.  As we try and trade in a liquidity deprived world ahead of two weeks of holidays many think its just about the tape – the technical push of the EUR from 1.40 to 1.42 and back is the story of the overnight. 

Enough of the gloom – the USD weakness trade is the driving force of surprise out of the FOMC – so watch for those countries that benefit most from points 1 and 2 – MXN and CAD – both will benefit if the US grows first or if its about inflation or if its about current accounts.  Expect CAD to test 1.1850 despite the troubles of the government, the doubts about BOC and the economy.  Expect MXN to hold under 13.02 the big breakout and the shove to 12.20-30 zones to happen methodically.