The same might be said shortly about interest rates and currency divergence. The prospect of central bank actions by the U.S. and the ECB creating divergence, maybe even the painful kind, is not going un-noticed by some.
If history is any guide, there are three major issues that warrant careful monitoring in the coming months. First, the U.S. is unlikely to stand by for long if its currency appreciates significantly and its international competitiveness deteriorates substantially. Companies are already reporting earnings pressures due to the rising dollar, and some are even asking their governments to play a more forceful role in countering a stealth “currency war.”
Second, because the dollar is used as a reserve currency, a rapid rise in its value could put pressure on those who have used it imprudently. At particular risk are emerging-country companies that, having borrowed overwhelmingly in dollars but generating only limited dollar earnings, might have large currency mismatches in their assets and liabilities or their incomes and expenditures.
And, finally, sharp movements in interest rates and exchange rates can cause volatility in other markets, most notably for equities. Because regulatory controls and market constraints have made brokers less able to play a countercyclical role by accumulating inventory on their balance sheets, the resulting price instability is likely to be large. There is a risk that some portfolios will be forced into disordered unwinding. Furthermore, the central banks’ policy of curtailing so-called “volatile volatility” is likely to be challenged. More:
MarketWatch.com/story/as-fed-hikes-and-ecb-eases-markets-could-get-wild-el-erian-says-2015-12-3
To be frank, there is nothing stealth about it.
To be frank, there is nothing stealth about it.
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