In a move designed to jolt its economy back to life and protect its export industries from an international currency war, the Bank of Japan (BOJ) said yesterday (Tuesday) that it would expand its balance sheet and lower its benchmark interest rate to "virtually zero."
The bank cut the overnight call rate target to a range of 0.00% to 0.1%, the lowest level since 2006. It last cut the target rate to 0.1% from 0.3% in December 2008.
Policymakers also will establish a $60 billion (5 trillion yen) fund to buy government bonds and other assets, inflating the balance sheet at a time when U.S. and U.K. central bankers are contemplating doing the same.
You Heard It Here First: A Global Currency War is Being Fought – And There Will Be No Victors
Brazil's finance minister, Guido Mantega, recently acknowledged to the global investment community what most trade officials already believed: An "international currency war" has broken out.
And, in this war, there won't be a real victor.
"We're in the midst of an international currency war, a general weakening of currency," Mantega told The Financial Times. "This threatens us because it takes away our competitiveness."
Mantega's comments came just weeks after Japan joined Switzerland in intervening in the foreign-exchange market. But the reality is that the currency war has been under way since 2008.
At least, that's when Money Morning Chief Investment Strategist Keith Fitz-Gerald first warned that countries - most notably the United States - would debase their currencies in a race to boost their exports and keep economic growth afloat.
"The government has adopted a weak-dollar policy," Fitz-Gerald said in an interview in March 2008. "They're sending out a message loud and clear: 'We want you to sell the dollar.'"
By holding the central bank's benchmark lending rate down in a record low range of 0.00% to 0.25% for close to two years now and buying up Treasuries in a policy known as "quantitative easing," the U.S. Federal Reserve is effectively debasing the dollar.
But the U.S. central bank isn't alone.
Seven Ways to Profit From the Worldwide Currency War
If you're like me, and you spend a lot of time perusing financial Web sites in search of the latest global investing news, you've probably started to see a lot of stories about rapid shifts in foreign exchange rates - including some "currency pairs" that have traditionally been rather slow-moving.
Back during the spring, for instance, the news was full of stories about how Switzerland was buying up European euros in an effort to weaken the strong Swiss franc - only to have that country change course and diversify its holdings by purchasing U.S. dollars.
During the summer, we watched as Japan entered the foreign exchange (or "FX") markets for the first time in nearly a decade in order to buy U.S. dollars.
Even South Korea has been a contestant in the currency-transaction arena, with that Asian tiger working to weaken its currency, the won, in an effort to improve its exports. Just yesterday (Monday), the won rose for the sixth-straight day, its longest winning streak in eight weeks, after the nation's foreign-exchange reserves climbed to a record $290 billion.
These events aren't random. But they are related. They're part of a worldwide currency war that's being waged before our eyes - and that will prove very costly to investors who don't recognize the game that's being played. Fortunately, we do - and we're going to tell you all about it.
To find out about those profit plays, please read on...
China Continues Game-Changing Energy Moves with Sinopec's $7 Billion Brazil Buy
Chinese state oil company China Petroleum & Chemical Corp. (Sinopec) (NYSE ADR: SNP) said Friday that it would invest $7.1 billion in the Brazilian unit of Spain's Repsol YPF S.A. (NYSE ADR: REP) to form one of the largest private energy companies in Latin America.
The investment is the second-largest overseas purchase by a Chinese company and drives the market capitalization of Repsol's Brazilian arm up to $17.8 billion. Analysts estimated the company's value at $10.7 billion earlier this year. Sinopec's investment gives it a 40% stake in Repsol's Brazil business, and access to the highly valued Brazilian offshore sub-salt oil fields.
The move highlights South America's importance to China as the Asian powerhouse goes on a spending spree to meet its fast-growing energy demand.
Controversial House China Tariff Bill Will Take America Down the Wrong Road
The U.S. House of Representatives this week overwhelmingly passed a bill that would enable the Obama administration to impose punitive tariffs on almost all Chinese imports into the United States - a controversial move that's intended to punish China for refusing to revalue its currency.
The House China tariff bill faces opposition in the Senate and from the Obama administration and isn't expected to become law. Let's hope that reluctance continues to hold: This bill is little more than a political con job and is quite possibly the stupidest thing that Washington could do right now.
Not only will this touch off a war the United States literally cannot afford to fight, but it's going to hamstring millions of already cash tight Americans by raising the cost of living dramatically while further eviscerating our already fragile gross domestic product (GDP).
Let me show you why...
To understand the hidden costs of the China tariff bill, please read on...
U.S.-China Tension Evident in Futile House Currency Bill
The U.S. House of Representatives today (Wednesday) will vote on legislation that would let the U.S. government take punitive actions against countries that undervalue their currencies.
The bill isn't likely to have any tangible impact on U.S. policy, but it's yet another manifestation of the growing friction between the world's two greatest economic powers.
The Currency Reform for Fair Trade Act (HR 2378) is the apparent result of increasingly harsh rhetoric towards China's currency policy, which U.S. lawmakers say keeps the yuan undervalued. It is a relatively toothless measure that will likely have no effect on U.S. policy, but instead serve as a rallying cry for Congressional lawmakers looking to win votes ahead of November's midterm elections, and perhaps, U.S. officials heading to a Group of 20 (G20) summit the very same month.
China Steps Up Effort to Derail BHP Bid for Potash
China is attempting to derail BHP Billiton Ltd's (NYSE ADR: BHP) bid for Potash Corp. (NYSE ADR: POT), as Beijing frets over the long-term supply of resources, according to a report yesterday (Wednesday) by the Financial Times.
Fearing that it could have a negative impact on Chinese imports, the state-run Sinochem Group has hired Deutsche Bank AG (NYSE: DB) and Citigroup Inc. (NYSE: C) to help disrupt BHP's bid for the fertilizer company, people familiar the matter told the FT. A Chinese bank, thought to be Industrial and Commercial Bank of China, was also part of the team.
Citigroup, which acts as joint corporate broker to BHP along with Bank of America Corp.'s (NYSE: BAC) Merrill Lynch unit, has asked to be relieved of its role in BHP's bid in order to advise Sinochem on a potential counter-bid.
What's In a Name: Can the U.S. Afford to Call China a Currency Manipulator?
It seems like every six months the debate over China's currency, the yuan, reaches a fevered pitch: The Washington bureaucrats threaten to label China a "currency manipulator" and Beijing threatens to dump its U.S. debt holdings.
Then, with the imminent approach of a major inflection point - be it a key international summit or major financial report - both sides grudgingly agree that a modest appreciation of the yuan would be mutually beneficial.
However, things could be slightly different this time around. China has routinely ducked calls to revalue its currency, and in doing so greatly agitated the West.
Record Breaking Contango Suggests Higher Oil Prices for 2011
ConocoPhillips (NYSE: COP) is paying $41,000 a day to keep a storage tanker capable of holding 3 million barrels of oil floating in the Gulf of Mexico, according to international ship- and offshore broking firm RS Platou. And the TI Europe is just one of hundreds of oil tankers sitting idle in waters around the world, as energy companies and investment banks await higher prices for crude.
Oil prices have fallen precipitously since the spring, as optimism about "green shoots" of economic growth gave way to fears of a double-dip recession. Prices have fallen more than 12% to $75.81 a barrel, from a high of $86.54 a barrel in April.
Indeed, with the U.S. economy stuck in the mire, the global outlook for oil demand has diminished - at least in the near-term. Longer-term, however, traders expect prices to surge higher next year as growth solidifies. That's why contracts for crude set to be delivered six months from now are worth more than crude at its current prices - an anomaly known as "contango."