This impending currency war, dramatically leading up to the G20 in Russia this weekend, will ultimately become a shot of adrenalin for the global economy. Global central banks (and their most vocal governments) are manipulating their currencies lower through expansionary policies in a bid to help their exports. Japan already took the lead, as the BOJ moved its inflation target higher and increased its repurchase program, sending the Yen 17% lower over the past 3 months. Europe, who competes with Japan on numerous exports, has some catching up to do, already debating inflation targets in Britain while Draghi has gone on the (verbal) offensive, with rate cuts possibly on the table. This means more cash pouring into the economy from all sides; a flood of capital, pure adrenaline.
The impending tide of capital is exactly what equity markets need to push through their previous highs. Most US markets are buttressed 1-2% beneath record levels, while the Russell 2000 & DJ Transports have already broken above. From a technical –volume, volatility, and moving average– standpoint, this year’s rally shows no signs of stopping. All is smooth sailing and a currency war look likes a nice gust of wind.