Unconventional Wisdom -- The liquidity guns of August:: Macquarie Research,

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Unconventional Wisdom
The liquidity guns of August
Event
 Financial market distress is forcing central banks into action.
Impact
 Central banks in Japan and Switzerland showed their hand last week with
easier monetary policy to stabilise currency markets. Bond market instability is
putting pressure on central bankers in Europe to do something as well.
 While a traditional easing of monetary policy may be limited to a small
minority of countries, the push for stronger liquidity growth is gathering pace.
And unlike 2008, this is happening when the global financial system is
drowning in excess US$ liquidity.
 This trend is going to be a lot more important than the impact of a ratings
downgrade in the US.
Analysis
 Currency appreciation forced some central banks into action last week. The
Bank of Japan (BOJ) intervened directly to weaken the Yen and also
announced an expansion of its asset-buying program. The Swiss National
Bank (SNB) cut the official interest rate and announced a form of quantitative
easing.
 It is understandable why these central banks took action. For example, the
Swiss Franc has roared against both the US$ and the Euro since the start of
the year. The massive currency intervention of 2010 by the SNB did not
achieve a permanent shift in currency markets. So another bout of significant
intervention alone was not an option. But something had to be done and if the
latest easing does not work then it has to be assumed that the dosage will be
increased.