Focus On Currencies

World markets are focused on currency markets says MoneyShow's Jim Jubak and he discusses what's influencing the US dollar in Japan, UK, and the EuroZone.

For the week ahead, it's currencies, currencies, currencies, that's what's driving the market right now, whether it's the euro, the yen, the pound, or the dollar, you're getting big responses to the different directions these currencies are going in. Basically everybody is falling against the dollar. The reasons for that fall into two categories. One is that the Fed is closer to starting to raise interest rates than any other central bank in the world, and as US rates go higher, it makes the dollar more attractive, you get more money coming into the dollar, so the dollar rises against the yen, the euro, whatever.

The other is a set of sort of geopolitical fiscal, more specific reasons, and basically, what you've got is a problem that you're seeing, growth slow or continue to be slow in the Eurozone, in Japan, some worries about growth in the UK but strangely enough, related to the September 18 referendum on Scottish independence, we'll talk about that in a minute, but what you're seeing there is a sense that aside from current policy trends, governments, and central banks in the Eurozone and in Japan are going to have to stimulate more to get growth back up, and that again will weaken their currencies and make the dollar stronger.

What you're seeing in the particular case of the pound, for awhile it looked like the Bank of England was going to raise rates even faster than the Fed, even sooner than the Fed, but the Scottish referendum has sort of thrown this into chaos. The referendum and the issue of what would happen if Scotland voted for independence has created huge uncertainties. The assumption by the Scottish Independence party, the party that says yes for independence, has been that somehow Scotland will be able to continue to use the pound and continue to use the Bank of England as the central bank. In recent weeks, the Bank of England has said, you've got to be kidding, you can't possibly believe that this would work. You've got now, currencies markets have basically said, well, so what would Scotland's currencies be? Would Scotland join the Eurozone? Scotland obviously would attempt, I think, at least something does, to join the European Union as an independent country.

What does this mean in terms of currencies and all this? The repercussions for the pound have been that the sense that the Bank of England would be able to raise rates ahead of an election, because one of the things the referendum has shown is how deeply, deeply, deeply and popular the Cameron conservative government is. It's unlikely that, it's likely that there would be pressure from the government on the Bank of England not to raise rates after this quote ahead of elections, whatever, so that has put pressure on the pound, the pound has been falling.

All these things mean that the US stock market is, at the moment, the sort of, one of the US financial markets, stocks and bonds, the market of choice in the world. The effect on the Japanese market is a huge rally, 15% from the April lows because Japanese stocks have gotten into the habit of going up when the yen gets weaker because it means better results from Japanese exporters, makes up for Japanese slow growth at home, but on the other hand you've got really, really slow growth. It looks like the forecast right now is for something around 0.5% growth in 2014. No somewhere near the government's not so lofty hopes for 1% growth, so that sort of puts some kind of lid on expectations for Japanese stocks. In the short term I think they'll go up, long term it's not as attractive a market as the United States. In Europe you've got real doubts about whether the bank, the European Central Bank can get growth going at all, so in all these cases you've got a sense that the dollar is the currency to be in, US stocks and bonds are the place to play that dollar, and that's where the watches would go through, not just this next week but the rest of 2014 because it looks like this trend is going to run for awhile.