Things to Ponder

What exactly moves the markets?? Is it the Trade? or the Interest rates? or flow of money? or is it the other "macroeconomic/macropolitical/macromenspeakmore" factors? Can a stagnant Interest rate really move markets (also read economy)? or should it be flexible to changing world scenarios? Can you exist in isolation? or should you respond to changes elsewhere especially those economies on whom your economy is tilted favourably for signals of change? How do you fight an inflationary scenario? What are the appropriate levels of inflation? Is an inflationary economy essentially good? What happens if your Interest rates are higher than the other economies? What if the Interest rates are higher/lower than the rate of Inflation? What does a Trade Surplus/Deficit have to do with the economy? What are the impacts of recession in an economy? Is growth of economy always good or is recession also an integral part of growth?

I have dozens of such questions. And they say you are no good if you dont have queries. And they also do add that you are no better if you cant find answers to them. So begins my quest for understanding them better. For a start, I will try and understand them in the Indian perspective, with maybe a reference or two to other countries and International scenarios. Wish me luck. And help me understand if you can.

I'm Back

Hi there. Back after a long hitaus. Well, a lot of water has flown under the bridge since I last wrote. The US markets got hit the wrong way and almost every other global bank was hit in the subprime onslaught. Markets world over tumbled and The Fed, worried of its impact on the economy (it has started showing, you see....) has cut the Fed rate in a hurry it may seem. But hold....... here is another news trickling in today and I quote "The Federal Reserve may push interest rates below the pace of inflation this year to avert the first simultaneous decline in U.S. household wealth and income since 1974." unquote. And this seems more real given the fact that real disposable income grew at a 2.1 percent annual pace in November, the slowest in 16 months, as higher food and energy costs eroded paychecks. Home prices in 20 U.S. metropolitan areas fell 6.1 percent in October from a year earlier, the most in at least six years.

And now another twist in the tale. With the Fed rates spiralling downwards, and others sticking to their Interest rates, is it possible for the US Dollar to become a currency for the carry? I dont think so, given the fact that there is the Yen, still there holding on to the crown. And remember, the USD didnt become the Carry currency even when the Fed cut the rate down to 1% in 2001 . But yes, for all those who are having exposures in the USD, it becomes more and more lucrative now to look up to other currencies like the Pound and the Euro. And therein arises another scenario. With the recent cuts in Interest rates by the Fed and the possibility of it cutting its 3.5 percent target rate for overnight lending between banks by as much as a half-percentage point tomorrow, it is likely that most other economies will follow suit, although at a slower pace. This does offer some disparity but given the high Trade stakes in the USD, the market would definately avoid it from becoming the carry currency.

Given the above, I would presume the green back to maintain a level of 103 to 108 against the Yen (with a bias towards 100 though beating the 103 mark may be difficult) while weakening against the Euro to near 1.49 in the very near future.