If you don’t you might miss all the capital outflow which, according to Deutsche’s George Saravelos, “not only has depreciatory implications for the euro, but also suggests that the consequences of Euroglut – low global bond yields and a stronger dollar – are here to stay.”
Oh, and blame Germany. Read more
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Mario Draghi has been very clear about what would push him into the full-blown QE of buying government bonds. He faces some serious opposition from German monetary conservatives even to the less whizzy QE he’s unveiled so far, though — that of buying asset-backed securities.
Full-on QE faces legal difficulties from the ban on financing eurozone governments, as well as deep-seated opposition within Germany and major issues about which government bonds it should buy, and in what proportion. (Italy has the most in issue, so buy mostly Italian debt? Or buy in proportion to shares in the ECB? Or to economic size, meaning the biggest share would be German? Or in proportion to the size of the banking system?).
So it feels like time to explore some alternatives that have been, inexplicably in our view, ignored. Read more
What ails Europe is not “secular stagnation” or “normalisation”, but rather the much more specific problem of a “Euroglut”.
So, at least, says George Saravelos at Deutsche Bank.
His argument relates to the idea that the global imbalances which were created by Europe’s massive current account surplus are becoming the defining variables which will drive a weaker euro, low long-end yields and exceptionally flat global yield curves, as well as ongoing inflows into “good” EM assets. Read more
Beat Siegenthaler, FX strategist at UBS, has been wondering about what the Swiss National Bank may do if the ECB’s measures to weaken the euro begin to test its 1.20 EURCHF floor.
He notes, for example, that there has already been a marked divergence between the EURCHF and the USDCHF:
A tale of missed opportunity. Denial. Oh, and possibly even certain death?
George Saravelos at Deutsche Bank looks at what are fast becoming intensifying euro outflows and wonders if it could amount to an important idiosyncratic driver for global markets. Yesterday, for example, the market witnessed a record euro liquidation day.
As Saravelos writes:
The drivers behind this are likely diverse – profit taking after an extended streak of inflows; geopolitical worries concentrated on Russia; contagion from broader risk-aversion. Cause notwithstanding, the concentrated nature of euro weakness and the breakdown in correlation with US yields strongly points to these “capital-flight” flows being an important idiosyncratic driver. The outflows have been larger than I would have expected, but until they stabilize, they will likely serve as an ongoing source of pressure on the euro and European currencies more broadly.
The deadline for European institutions to be compliant with the Single European Payment Area (SEPA) standard came and went on August 1.
In theory, that means anyone in Europe should from now on be able to make and receive payments across the union on an entirely frictionless basis. For the euro project it’s the realisation of one of the system’s key objectives.
As the ECB noted:
It allows businesses to grow and to broaden their reach within Europe, and reduces costs by providing a standardised framework for all their payments. Businesses can now use a single system and set of accounts for all their euro trade in Europe.
Things that should make Draghi smile include…
Click Citi’s charts to enlarge. They show that the euro’s correlation with stocks has turned negative following the ECB’s swarm attack earlier this month. Read more
Ignoring the fact that the euro is acting more like a random walk model than usual, one seemingly obvious consequence of Draghi’s swarm attack is the euro’s growing attraction as as funding currency. As Barc said:
The structural selling of EUR vol post-meeting was the standout FX trade. We view this as further evidence that the current carry-supportive environment characterized by accommodative global monetary policy, historically low vol and strong equity market performance is likely to continue. It also supports our view that the EUR should be the funding currency of choice.
And from BoNYM’s Simon Derrick over the weekend: Read more
Euro chart du jour, from Nomura:
We’d call it the new yen, but we all know what happened there. Read more
We know who he is, we just don’t get what he’s doing. He does so like confounding expectations on his island of stability.
This time with inflation at 1 per cent there was a belief that Draghi would make some sort of compromise gesture while keeping rates on hold, even if it amounted to SMP tokenism. But, nope, he disappointed… despite the ECB’s own 2016 inflation forecast coming in well below 2 per cent. Doing nothing in the face of that isn’t exactly reassuring — it’s a lot easier to fight deflation risks than the real thing. Read more
Update – It’s not just the rate cut, as Mario Draghi opens the presser at pixel time:
Earlier – Bold move or way too late? You decide: Read more
Consider this from Morgan Stanley’s FX team:
A telling chart from Citi’s Steven Englander:
According to Nomura, since 1980, there are only two periods of economic divergence — between the US and Europe and the UK — comparable to what we are observing currently.
Olli Rehn (left) and Valdis Dombrovskis, the Latvian prime minster, (right) regrettably seem to have got lost in a Powerpoint presentation. Read more
The single currency, and financial markets generally, have been stubbornly stable in the face of the Cypriot mess (ongoing, obvs) and it’s not really clear why.
Japanese investors are a powerful bunch in world markets. For a microcosm of this, just look at Australia; Japan plays a big role here in debt and in turn, in currency; and it’s a market that has been very attractive to foreigners of late, keeping the currency stubbornly high regardless of price changes in the country’s key exported commodities. BUT, as with everything yen at the moment, there is a serious shift going on. Read more
The currency war meme rumbles on as the G7 does its very best to avoid a coherent message amid arguments about whether drawing a distinction between “domestic objectives” that weaken a currency and just plain weakening it actually matters. Ho hum. Read more
Little or none seems to be the answer…
I wrote on Monday about the ECB’s options for expanding its balance sheet but skimmed over the idea of direct FX intervention on the presumption it just wasn’t going to happen and the ECB would push via less obvious channels. As I was (justifiably) rebuked, the aim here is to make quick amends. Read more
Mario Draghi talked, everyone was a little confused, a little wary… so the euro fell. He OMT’ed the FX market. Clever.
But what if talking isn’t enough? As Capital Economics argue, the power of talk is diminished when others are taking action: Read more
“Oh, Hollande…” said Mario Draghi as the rest of us wondered if he had or hadn’t entered the supposed currency wars. Or if, in fact, the question was redundant.
The euro’s dive on Thursday was impressive and clearly the result of ECB president Draghi’s comments after the ECB’s rate setting meeting. But whether it was justified or not is very much contested. Read more
You gotta roll with fashion:
Not many people seem bothered by France’s overnight downgrade by Moody’s. The euro shrugged and French bond yields crept upwards at a snail’s pace.
But one place the downgrade might have a real and lasting impact is within the Swiss National Bank. They have a predilection for core eurozone bonds and the downgrade might just prompt them to ditch what holdings they have and/or stop loading up on French debt.
Dear euro, this has been your 2012 so far. Do try and get through the rest safely:
At Thursday’s ECB press conference, Mario Draghi unveiled plans to introduce a new series of euro bank notes. And there was a little video to accompany the news… Read more
Pushing a fresh austerity package (the price of financing the next stage of the country’s bailout) through parliament on Wednesday night cost the Greek government and Antonis Samaras, the centre-right prime minister, dearly. And while there is no guarantee a repeat performance can be staged, there is every probability the boulder will slip and one will be demanded. Read more
Click through the pic for the full document (it’s not the most fun read):
Now, we don’t want to get carried away here. The report – covering lending in the third quarter and expectations for the fourth – wasn’t pretty, but it’s worth pointing out that there are glints of cautious funding optimism to be found, both within the report and without, particularly where corporates are concerned. Read more
From the ECB’s September update on monetary developments in the euro-area released on Thursday:
That’s euroland M3 – the broad money supply measure — coming in below expectations and dropping again to 2.7. Really brings to mind Draghi’s warning to the Bundestag that “In our assessment, the greater risk to price stability is currently falling prices in some euro area countries”, doesn’t it? Read more