Currency wars continue
Exchange rates have experienced some notable swings in the last two years as policymakers attempt to maintain their country's competitive position in global markets through active intervention to drive their currencies up or down. Notable moves include the Swiss decision in 2011 to deploy a massive amount of its reserves to prevent the Swiss franc appreciating further, Brazil's deliberate devaluation of its currency, the Brazilian real, and most recently Japan's announcement of policy initiatives designed to drive the yen back down after a sustained period of appreciation. The pound fell sharply during the crisis, but since then is one of only a handful of currencies to have stayed within a relatively narrow range.
Confidence and investor preferences
Private investors have been in risk-averse mode for most of the period since the financial crisis in 2008. This is evident in the wildly divergent rate at which funds have flowed into different asset classes. Flows into bond funds have consistently exceeded those flowing into equity funds for almost the entire period, reversing the normal historical trend. For the first time since 2011, however, this pattern reversed in January this year. If that continues, it could mark the start of a more risk-tolerant phase in the markets.
Unemployment, stocks and bonds
Recent years have seen a strong correlation between the unemployment rate in the United States and the relative performance of stocks and bonds. When unemployment is falling (which appears in the chart as the orange line rising), the trend is for equities to outperform bonds (the blue line also rises). The reverse is true: when unemployment starts to rise, bonds do better. The pattern has held since the financial crisis. If the US economy continues to recover, that suggests further equity outperformance may lie ahead. The Federal Reserve has said it will maintain interest rates at very low levels until unemployment reaches 6.5%, even if that risks higher inflation.
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