A Forex View From Afar

Please cut, we are baking another bubble.

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Markets do not want to move too much these days, everybody is waiting for the FOMC decision on Wednesday. This will clear up things for some time ahead, either letting markets run (see Forest Gump) or make them see (and feel) long forgotten levels like 11k,10k or even lower. Equity Markets are expecting a 50 basis point reduction. Whatever happens we would recommend trying to avoid the news, and stick with the momentum. It’s much safer this way when trading Forex

After the 75 point reduction last week, and with another 50 points likely coming this week, it would take us to 125 points cut between 2 FOMC meetings, which is a lot of lost Interest, imagine how the American saving population feels. (Mind you that is a bit of a Storm in a Tea Cup because the US Savings rate is in the negative; forget the lower Interest, it is not affecting Average Joe). Also, this would take us under the inflation benchmark, of 4.1% on a YoY, and 3.2%annualized, as measured by CPI.

What does this means? In the simplest form I can spell it out…spend as much as you can and when you reach your limit, go get a loan.
If this second rate cut materializes, another 50 point to 3.0%, we won’t have anything left to protect our self from the devaluing dollar but just spending or investing. Banks will offer negative return for your deposits, as probably most bonds will start to move to.
And why not take another loan, when inflation is 3% and you have to pay 4% interest rate. You’ll actually get a loan with a 1% interest rate. That’s a pretty good deal.

This is a risky move from the Fed, these strategies are taken to boost spending and cut savings and this is what usually leads to bubbles. We got the housing bubble the same way. If regulators refuse to stop the Boom and Bust Cycle, we’ll have soon another bubble to burst..

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