With one eye on the evolution of monetary policy
In my 20 years in the financial world, I have witnessed radical changes generated by a series of events that shook the world. I began my career in Russia just a couple of years after the collapse of the Soviet Union, and developed with it during its recovery.
With the global economy still striving to recover from the economic crisis, each central bank has different issues to address and find solutions that will lead to growth. The world is still plagued by high public and private debt, remarkably increased unemployment rates (with technological advancements reducing the number of available jobs and lowering salaries), limited investment, and a slack in real-estate markets such as the US.
As a result, central banks have adopted ‘unconventional’ monetary policies. Subsequent fears that an injection on that scale of global liquidity would lead to hyperinflation, higher gold prices, and the eventual demise of fiat currencies (a currency which derives its value from government regulation or law) have been unfounded. The latest and most relevant example of ‘unconventional’ monetary policies is that enacted by the European Central Bank, with its quantitative easing (QE) programme worth 1.1 trln euros. As part of the programme, which was announced in January, the ECB started buying government debt on March 9 with the newly created money.
The QE programme comes after the harsh austerity measures that have been implemented in the Eurozone in the wake of the crisis. Austerity has led to low inflation - or deflation – which has pushed up real interest rates and forced businesses, households and governments to cut spending in order to keep their debt from rising. However, massive buying of government bonds through QE coupled with forward guidance (FG) are powerful signals of a central bank’s determination to bolster growth and keep inflation on target.
Nonetheless, the EU and other countries’ easing is now being met by ‘tightening’ measures being implemented by the US Federal Reserve, and there is a very real possibility that such incompatible policies may trigger market volatility.
Many feel that we are entering a new era in monetary history, as central banks are taking a more active – even though unconventional – role in dealing with the economic challenges in their effort to be successful in reducing financial volatility. The fact that foreign exchange trading has become such a globalised activity means that national central banks play an even greater role in forex than ever before. Forex traders should be aware of these economic trends and events to make informed decisions. During this time, traders need to be extra careful, manage their risk and to carefully consider entering into new trades near the time of such announcements.
Perspectives change, needs change. But we need to remind ourselves that those changes need not be taken in a negative way. We need to leverage them. Being unconventional will eventually become conventional. Evolution comes naturally – one way or another – but it can be within our control.