The Foreign Exchange Market Is Minutes Away From The Central Authorities To Control The Overall Situation.

The well-known financial blogger Of Two Minds blogger Charles Hugh-Smith said the US monetary policy was slow to normalize because the Federal Reserve was in an awkward position in front of the terry Finn problem. Just one more market panic is enough to keep the foreign exchange market out of the control of central banks.

The terry Finn problem, put forward by American economist Robert Triffin in 1960, mainly refers to the responsibility of the international currency to provide global liquidity. The countries that provide reserve currencies need larger and larger current account deficits to ensure adequate liquidity for the international market, but when a country's deficit is increasing and accumulating, liabilities become higher and higher, which in turn will impact on monetary confidence.

According to Hugh-Smith, the core of the terry Finn problem is that the issuing countries of reserve currencies must serve two different objects: the domestic economy and the international economy.

At present, the US dollar is the main reserve currency of the international economy. When the Federal Reserve drops interest rates to zero, the US dollar is weaker than other currencies. In a zero interest rate environment, investors can borrow money at almost zero cost and take part of the free money to buy higher yielding bonds or other currencies, that is, to earn profits through carry trade.

A large proportion of these assets exist. emerging market The dollar borrowed by investors to buy other countries' currencies or assets is expected to reach US $7 trillion.

Once the Fed has tightened monetary policy signals, the US dollar will strengthen, and the profit margins of the carry trade will be squeezed. Investors who buy assets through other currencies will start selling assets, thereby triggering the decline of emerging market currencies and capital markets.

At the same time, Hugh-Smith said that the RMB exchange rate is still largely pegged to the US dollar. If the dollar appreciates, the renminbi will also appreciate in value, which will lead to a blow to the Chinese export industry.

Therefore, though Federal Reserve It is necessary to normalize interest rates before the arrival of the new crisis, but it also needs to maintain the weakness of the US dollar, thereby avoiding the pressure that China faces a significant depreciation of the RMB exchange rate.

Hugh-Smith writes that those who hold a large number of devalued Renminbi in China naturally want to convert the US dollar before the depreciation of the renminbi, which leads to capital flowing from China to the US dollar and other Western assets.

In essence, the Fed needs to raise interest rates to strengthen the US dollar, thereby making the United States strong. Consumer The price for oil and other commodities is relatively cheap.

As a result, the Fed faced an awkward situation. Hugh-Smith wrote:

If the Fed normalize interest rates (after the implementation of seven years of zero interest rates and stimulus policies, the Fed also needs to do so), it will lead to a stronger dollar, which will bring pressure to the RMB and other emerging markets, which will further impact the already weak global economy.

No matter what policies the Fed chooses, there are no winners here. This is also why the Fed's signals are inconsistent: a statement suggests that the rate hike may be coming, but then there may be a hint of "pigeon pie" that the rate hike is still far away and the international market can be ignored.

By strengthening the US dollar, the fed directly increased the purchasing power of US dollar holders. This reduces the export costs of countries with weaker currencies, and they are more willing to exchange goods for dollars.

Hugh-Smith also said that in reality, the market itself may push the US dollar stronger no matter what the Fed says and how it will do it. If at one time, traders agreed that the yuan would be depreciated once and for all, it would trigger a stampede in the foreign exchange market. He wrote:

The size of the Federal Reserve's balance sheet is US $4 trillion, while the daily trading volume in the global foreign exchange market is higher than US $5 trillion.

Once traders believe that China needs to devalue the renminbi sharply, it may be powerless even if central banks intervene in coordination.

Hugh-Smith concludes that no central bank will recognize that the market is out of control, but the reality is that just one more market panic is enough to keep the foreign exchange market out of the control of central banks.