ECB managing board member Bini-Smaghi is on the wires discussing exit strategies just hours after the ECB launched its most ambitious “non-standard” monetary step, offering the market unlimited funds for one year. He says getting the timing right in removing the accommodation is key to a non-inflationary recovery. Inflationary risks abound as so many countries take unusual liquidity steps but the severity of the recession keeps those risks low over the next two years.
That last sentence is probably the most important one for the market. Traders have been selling the dollar for months on the notion that inflation is right around the corner. That’s nonsense. With 10% unemployment and capacity use about 67% in the US economy, there is so much slack to make up that inflation is a mirage for the foreseeable future.
Trading spot FX on the notion of inflation over the two-five year time horizon is assinine. A thousand other factors will impact the market long before your inflation bet is proven right or wrong…
