At the present time, due to the lack of a strong, one-sided fundamental driver, it is looking more and more likely that the forex market will trade in a range.
U.s growth looks set to slow as the year progresses, but this outcome has pretty much been baked into market sentiment. The Fed is holding its balance sheet steady although it is rolling over agency debt into Treasuries as those assets mature.
The risk here is with the employment picture which, if the latest unemployment figures are any indication, will show an anemic level of growth in private sector jobs if not an outright loss.
Speaking of jobs, we really shouldn’t expect to see any sort of significant growth going forward. Of the three main drivers of jobs (significant technological advances, credit bubbles, and exports) only the latter has the potential to make a contribution. However, that will depend on two things; investors becoming more accepting of risk, or the Fed expanding its balance sheet (which means it will print more dollars).
Could the market become more daring and get back into stocks? It is doubtful given that jobs do not figure to gain much going forward, which means investors will figure that U.S. consumer spending will remain constrained.
That leaves the Fed as the main backstop for the economy, but the only option left open at this point is to resume printing dollars and expand the balance sheet. This of course presents many risks as well, specifically the loss of confidence that investors now have in U.S. debt.
There is one other option available although we are not likely to see it happen-the Fed can begin talking about eliminating the “extended period” language in its statements. Here is why this could offer an avenue to economic growth:
The simple fact is that people tend to buy (assuming they can) if they believe that prices will be moving higher in the not too distant future. At this time, consumption is being negatively affected because the general perception is that prices on things like homes are bound to fall. In other words, people expect to see further price deflation so they are delaying their purchases.
If the Fed were to indicate that the extended period language was to be eliminated soon, it would become obvious that interest rates were bound to rise at some point. Higher interest rates of course mean that the cost to carry debt will increase. And if people thought that the cost to carry debt was going up, they might buy now rather than wait.
The obvious market likely to be most affected by this perception would be housing. If consumers believed that interest rates were going up soon, those who can buy now would have more of a motivation to do so, especially with prices as depressed as they are and with interest rates still at rock-bottom lows.
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