It seems easy-money monetary policies continue to be the only influence for investors and traders to take action in the markets. And risk takers can breathe another sign of relief after Janet Yellen’s testimony on Thursday, as well as the potential for more stimulus in Japan.
After giving her prepared speech (which was released to the public a day early), she reiterated to the Senate that the priority of the Fed will continue to be strengthening the US economy, and that it’s important to not remove support, especially with a fragile recovery. She also reiterates that even if bond purchasing is reduced, that interest rates will remain low, meaning that monetary policy will remain highly accommodative even with a Taper, whenever that may be.
Let’s remember that the Fed isn’t the only game in town when it comes to easy-money policies. This month, the European Central Bank cut its refinancing rate to 0.25%, with a little bit of jawboning that it will remain accommodative for as long as it takes. And the Bank of Japan is on it’s own low interest rate/bond buying program for probably years to come, with the potential to increase it soon after a weaker-than-previous quarter GDP number (1.9% vs. 3.8% in Q2) from Japan was released this week.
Normally, economic weakness is the reason why central banks engage in accommodative monetary policy, so why is it a green light for risk taking? Well, because these policies allow banks and other financial institutions to borrow from the central banks–almost for free–which in turn is invested in higher-yielding assets in the financial markets.
In recent years, that has meant selling the Japanese Yen, Swiss Franc, and sometimes the US Dollar to buy higher-yielding currencies or other financial vehicles like equities. And that’s what we got this week as the yen took hits against all the majors, and equity markets popping higher. Take a look at this week’s price action in a few yen pairs:
(Horizontal lines indicate week’s opening price.)
And with equity markets gaining as well (check out the Nikkei breaking 15,000 or the FTSE nearing its highs in a year), it seems like traders are ready to buy, buy, buy–or at the very least, start dropping any long yen positions and maybe start some carry trades. Of course, only time will tell if this is the beginning of a new leg higher in risk taking, but with no major central bank ready to tighten monetary policy for the foreseeable future, it’s a trade framework to consider.
So, what do you think? Is it time to get long some risk on continued easy monetary policy? Leave your vote in the poll below or a comment in the comments section–thanks!