WEEKLY MARKET COMMENTARY
LPL Financial Member FINRA/SIPC Page 2 of 3
Since mid-2008, when the world’s central banks aggressively appliedstimulus through bond-buying programs and expanding the amount ofassets on their balance sheets, the ECB has increased its holdings by 17%of GDP — more than doubling assets from 16% of GDP to 33% currently.The ECB’s balance sheet grew sharply after the collapse of Lehman Brothersin September 2008, and then jumped further as the two “LTROs,” or three-year loan long-term reﬁnance operations, took place in December 2011 andlate February 2012. These most recent operations pumped more than 1trillion euros into the banking system for the beneﬁt of struggling Spanish,Italian, and other European banks.Over the same mid-2008 to current time period, the Bank of Japan increasedthe assets it holds by 11% of GDP, going from 20% to 31%, and the Bank ofEngland took assets up by 14%, from 7% to 21%. The U.S. Fed accumulatedassets equivalent to 12% of GDP, from 6% to 18%. Other central bankshave assets relative to GDP well beyond that of the Fed, especially amongthe emerging markets. For example, the People’s Bank of China holds assetsequivalent to about 25% of GDP.Nearly all of the world’s major central banks have each engaged in a battleto provide aggressive stimulus of similar size relative to their economy.This similar percentage has been not merely to battle recession. It has alsobeen to battle the currency impact of the actions by other central banks.While certainly not the only factor affecting currency values, the central bankactions pump more liquid money into an economy and have the tendency toweaken the currency relative to those of trading partners—unless the centralbanks of those trading partners are also engaging in a similar amount ofaggressive actions. Those countries that have engaged in more bond-buyingas a percent of their GDP than the U.S. Fed have seen their currenciesdepreciate relative to the dollar, while those that have done less have seentheir currencies rise versus the dollar.
Central Bank Currency War
Mid-2008 – Present
Central BankCurrencyChange in Central Bank Assets as % of GDPRelative to Change in U.S. Fed AssetsChange in Currency Relative toUS DollarEurozoneEuro+5%-6%JapanYen-1%+34%UnitedKingdomPound+2%-20%Source: LPL Financial, Bloomberg 10/22/12Currency Risk is a form of risk that arises from the change in price of one currency against another. Wheneverinvestors or companies have assets or business operations across national borders, they face currency risk iftheir positions are not hedged.
The Fed’s efforts are aimed at both keeping interest rates low for borrowersto stimulate economic activity and keeping the dollar from appreciating versustrading partners and risking damage to the economy from falling U.S. exports.
Since mid-2008, when the world’scentral banks aggressively appliedstimulus through bond-buying programsand expanding the amount of assetson their balance sheets, the ECB hasincreased its holdings by 17% of GDP.Those countries that have engaged inmore bond-buying as a percent of theirGDP than the U.S. Fed have seen theircurrencies depreciate relative to the dollar,while those that have done less have seentheir currencies rise versus the dollar.