A Problem So Massive Even Central Banks Cannot Contain It

October 12, 2016

The financial world has missed the biggest story of 2016. That story is the fact that the CURRENCY markets have stopped paying attention to Central Bank policy and are now deciding things for themselves.

For those who are unfamiliar with the significance of the currency markets, a brief recap is in order. The currency markets are the largest, most liquid, and most “alert” markets on the planet.

Globally, the stock market is roughly $69 trillion in size and trades about $191 billion in volume per day.

The bond market (including corporates) is a little over $199 trillion and trades about $700 billion in volume per day,

The currency markets are unmeasured in size as every currency trade is ultimately a pairs trade (meaning to buy one currency you have to sell another). However, we do know that the currency markets trade $5.3 trillion in volume per day.

Put another way, the currency markets trade over 26 times more volume than the global stock market every single day. As such they are the most liquid, sensitive markets in the world.

I want to also stress that at this size, the currency market is much larger than Central Banks. If the currency market begins to revolt against a particular Central Bank, there isn’t a thing said Central Bank can do about it.

With this in mind, the currency markets are the first markets to pick up on major changes in the financial system.

The first indication that Central Bank monetary policy was no longer dictating currency market moves occurred with the Euro in 2015. 

The European Central Bank, or ECB, was the first major Central Bank to implement Negative Interest Rate Policy or NIRP. The ECB cut rates to NIRP in June 2014 and again in September 2014.

Those first two NIRP cuts were the last time the Euro really reacted. The ECB has since cut rates further into NIRP on December 2015 and again on March 2016. Both of those cuts failed to produce a significant reaction from the Euro.

This was the first indication that the currency markets were beginning to revolt. However, it was the Bank of Japan’s move to NIRP in January 2016, which confirmed this.

The Bank of Japan implemented NIRP for the first time on January 28, 2016. Unlike the ECB, which got a significant devaluation from the Euro with its first NIRP cut, the Bank of Japan got NOTHING from the Yen as a result of its first foray into NIRP.

Indeed, the Yen actually began to rally as soon as the BoJ went to NIRP. And it hasn’t stopped since!

The Yen has appreciated nearly 20% since the BoJ went to NIRP. This is a HECK of a move by a major world currency. And it sends a clear signal that the currency markets are no longer reacting to Central Bank policy.

Indeed, look at the British Pound, which is now dropping like a stone.

Central Banks are losing control of the markets. The next round of the Financial Crisis is about to begin.

During the first round banks went bust. During this round entire countries will be going bust.


Graham Summers

Chief Market Strategist

Phoenix Capital Research

Graham Summers is Chief Market Strategist for Phoenix Capital Research, an independent investment research firm based in the Washington DC-metro area with clients in 56 countries around the world.

Graham’s clients include over 20,000 retail investors as well as strategists at some of the largest financial institutions in the world (Morgan Stanley, Merrill Lynch, Royal Bank of Scotland, UBS, and Raymond James to name a few). His views on business and investing has been featured in RollingStone magazine, The New York Post, CNN Money, Crain’s New York Business, the National Review, Thomson Reuters, the Glenn Beck Show and more.

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