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Guest Post: Why Isn’t The EUR Lower; Central Bank Agreement?

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Submitted by Maurice Pomery from Strategic Alpha

Keep The Faith

Why isn’t the EUR lower; central bank agreement?

The question most asked by clients is why, with all that is going on in Europe, is the currency not much lower as nearly every analysts has a target of between parity and 1.2000? It is a very good question but way back at the start of 2011 I suggested that I felt some accord had been reached by the G20 to hold the EUR stable and this I still believe. The issue is that the EU leadership and indeed all those that trade with the zone, realize that equity markets would be held up by QE and that bond yields could be kept down (wrong) using the same method but the whole house of cards could be brought down if there was a run on the currency and a general loss of confidence in the currency. It would simply be a disaster and to me it is central bank manipulation that is keeping the EUR so ridiculously strong so selling breaks to the downside has seen many karted out on a stretcher and sent to the asylum.

The point is that what will it take for a substantial fall in the EUR? Again we have seen some staggeringly bad news in the zone and some are suggesting if the EUR does finally start sliding fast it could be the biggest sign of a break-up so I guess the central banks will do what they can to hold it. Spain as we know is huge but the concerning thing here is that the contagion to Italy and possibly France (and don’t forget Sarkozy is still losing at the polls) continues and the IMF and EU bail-outs cannot take THAT hit if they all come close together. These hikes in Yield will take their toll for sure so we have to assume more easing and liquidity stuffing from the ECB. They will need to throw everything they have at this soon as to me one the most dangerous issues here is the exposure of banks to property still and nowhere more than Spain. Another financial crisis, this time led by EU banks looks a very real possibility and they face some downgrades from Moody’s in coming weeks!

But will it work? There is growing skepticism about this as it is clear the problem is not a liquidity issue here and thus the medicine may be the wrong one. We also know that austerity measures take years to effect the economy and the initial move is years of stagnant or falling growth. Germany is still doggedly against any kind of wealth transfer so an EU bond still looks unlikely. Just how much is the EU prepared to throw at this? Don’t get me wrong, Germany need a strong Europe as much as Greece do and whilst many believe Germany is the only one that can afford to leave, I doubt they will unless there is a severe change in the political structure there. But citizens within the zone, whist seeing some of the benefits in the past, are concerned that the future for them and more importantly their children looks very grim indeed. We may yet see a political backlash to all this and France may set a very dangerous precedent for the zone if Sarkozy loses.

So we must expect more LTRO’s and action from the SMP I guess but I fear the impact will be muted and yields may not fall far. The SMP has only ever slowed a daily move rather than reverse a trend and some still suggest there is no need for the ECB to buy Spanish or Italian bonds (Knott another one on Friday). Is the ECB about to go all in and flush trillions into the system with more backdoor QE? The Germans might have something to say about that and the discussions behind closed doors must be heating up. This week’s G20 meeting demands some action as markets are forcing the point but we rarely get much from these; at least publically. A strong communique is expected but I am not sure we will get more than the usual; “we are committed to the zone” rubbish. The IMF is calling for more funds but the likes of the US are looking inward and correctly do not see the IMF’s mandate as including propping up a currency regime of a group who could afford to fix it if they wanted to. Without debt forgiveness or some form of wealth transfer, these yields could explode and the speed of the move will be far greater than the speed at which they will react and agree to do something. Mind the gap!

The markets have moved this issue to another level now and the stakes have risen exponentially and EU leaders and Draghi need to focus and dump the complacency or this project is over. An imploding EU is in no one’s interest and a coordinated effort from the US to China may be needed. Is there such accord in G20? We may be about to find out if this week goes as badly as last. If massive QE is the answer (and it isn’t) then we may finally see this EUR head lower but the resolve of the central banks to stop a rout will be strong and rightly so.

With the Fed on data alert, today’s Retail sales will be monitored closely.

With the US consumer being about 70% of the US economy, retail sales matter. Interestingly consumer confidence has started to soften slightly so it will be interesting to see if spending catches up with confidence levels. If it does then Bernanke will get another wake-up call and calls for more QE from the doves may be heard. However the Fed is clearly split on this and a decision pro-actively will be hard to justify it would seem as many of the Fed voting board may demand more data. The trouble is time is running out. Quoted in the FT; Eswar Prasad of the Brookings Institution said: “The global economic recovery is still sputtering due to a lack of robust demand, policy tools that are stretched to their limits and unable to muster much traction, and enormous risks posed by weak financial systems and political uncertainty.” Again the banks remain exposed as the housing market fails to rise far off the lows and unemployment remain elevated.

Yet again I wish to highlight the difficulties facing the Fed into next year and as we all know, central banks need to plan ahead and set policy for at least a year or two ahead. The US has got to deal with its debt problem and growth will certainly be hit. So should Bernanke act now to set policy for next year or wait? I am not sure he can afford to wait and if he does he may regret it. Policy tools are now blunt and if the QE threat does not support markets then all he will have left is the Dollar! As fears over the EU rise then the US bond markets are attracting the safe haven bid and the Dollar is rising. This must surely be of concern to the Treasury and Fed alike if it goes ballistic.

If Bernanke can suggest to his voting board that unemployment (the real one not the manipulated garbage from the BLS) is rising again and that today’s retail sales suggest the consumer is deleveraging as I think he is, then he may feel that June is the latest he can act due to the upcoming election and therefore will need to communicate this soon. Thus the data today is important. With the Fed data dependent the markets will be trading nervously and we need guidance as promised by Bernanke. I fail to see how clear he has been so far as every Fed speaker seems to think differently. However Bernanke holds sway on this committee as we have seen before. Bernanke clearly believes in QE (the jury is out on this for me) and thus may feel a shock and awe effect would be helpful. The amounts would have to be massive but I believe he realises how bad next year may be.

 

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Mon, 04/16/2012 - 07:40 | 2348089 JustObserving
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Why Isn't Gold Higher? Central Bank Agreement?

Mon, 04/16/2012 - 07:45 | 2348093 SilverIsKing
SilverIsKing's picture

You are correct. A gold plated tungsten star for you.

Mon, 04/16/2012 - 07:42 | 2348090 francis_sawyer
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"Why isn't the EUR lower?"

~~~

Because central planning works (until it doesn't)... Apparently they haven't finished looting yet...

Mon, 04/16/2012 - 07:55 | 2348107 EscapeKey
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"Central planning works, when we're the central planners."

Mon, 04/16/2012 - 07:47 | 2348096 orangegeek
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The USD dollar runs opposite to the EUR.  The question isn't about what keeps the EUR up.  The question is what keeps the USD down.

 

Obama is spending like mad - $5T in his first term added to the debt.  When the USD stays down, the markets are propped up as well as the EUR. Obama is running out of time.

 

Why is Obama trying to keep markets up?  So he can get re-elected.

 

But the markets are looking weaker by the day.

 

http://bullandbearmash.com/index/djia/hourly/

Mon, 04/16/2012 - 08:55 | 2348186 dbomb12
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The only way Barry stays in power is to collapse the economy call martial law and suspend elections, with all the new executive orders being signed by him recently looks like its a race to the finish

Mon, 04/16/2012 - 09:25 | 2348255 eddiebe
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Barry doesnt need any of that as long as he can tell the programmers over at diebold how to rig the machines. Looks to me he's been playing nice for TPTB and will be our next commander in chief no matter whom we vote for.

Mon, 04/16/2012 - 07:48 | 2348099 Gringo Viejo
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Central Bank Agreement?  'Ya Think?

Mon, 04/16/2012 - 08:07 | 2348116 Ted Baker
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ALMOST CORRECT - HOWEVER THE AGREEMENT IS TO WAIT FOR THE FED TO DO WHAT THEY DO BEST CRTL+P WHICH WILL THEN BOOST THE EURO BACK TO LEVELS SEEN BEFORE CLOSED TO 1.36-1.37....HOWEVER THE ECB WILL HAVE TO DO MORE ASSET PURCHASING AND BOJ MORE CRTL+P...WATCH THE SPACE. IN THE MEAN TIME LET THE US EQUITY MARKET, UK AND EURO EQUITIES TO SELL OF ANOTHER 10%+ WITH FINANCIALS THE KICKER AND LEADING THE PACK. REMEMBER WE CAN NOT UPSET TAX PAYERS TOO MUCH...

Mon, 04/16/2012 - 08:12 | 2348118 Quinvarius
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It is called groupthink.  The Dollar is far worse off than the Euro.  They are both worthless ghosts of money.  The central bankers will maintain whatever exchange rate they want because they can do whatever they want with meaningless valueless paper.  And as they do it, they destroy the economy.

Mon, 04/16/2012 - 08:28 | 2348144 SimpleandConfused
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The US wants a weak dollar for exports, right?  Shouldn't the ECB want a weak euro for the same reasons?  I was under the impression that the world was going to see a race to the bottom as everybody tries to have the weakest currency.

Is the euro above 1.20 an apples/oranges thing when it comes to exports and weak currency?  It would seem like the ECB would welcome the break.

Mon, 04/16/2012 - 09:21 | 2348240 eckart
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don't worry, just keep buying Gold!

Mon, 04/16/2012 - 09:22 | 2348244 eddiebe
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Just look at the banksters long position in the Euro.

 I can't understand how some people still believe that markets aren't completely manipulated. I suppose all the analysts still want to analyze and get paid handsomely for all their in debth charting and deep insights into the why and how. All of it is worthless. The banksters will have their way until the whole show comes tumbeling down, and all the theorizing on why currencies and stocks and commodities and bonds do what they do around the globe is worthless unless the central fact is grasped, admitted and understood.

Mon, 04/16/2012 - 11:18 | 2348594 Ghordius
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1+ "Just look at the banksters long position in the Euro"

though when you write that I have to think about Jon Corzine's positions...

and how the poor, poor guy now suffers in prison for having been so long in all euro-things.

Well, at least we have DSK soon winning the French presidential elections for the socialists...

Mon, 04/16/2012 - 09:45 | 2348258 bshirley1968
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Everyone has to see by now that the EU and the US are in this thing together.  We do everything together.  I also believe the same blue bloods that were running England after the War have infiltrated the US and are running things over here.  If that be the case, then the currency thing between the dollar and euro is like the difference between a Chevrolet pu and a GMC pu.  They are really one in the same.  The dollar uses the euro as a comparison and the euro uses the dollar as a comparison.  That way, one can go down thus allowing the other to print.  Example:  The euro weakens due to liquidity/capital/confidence issues and that allows the fed to print, thus bringing the dollar lower and "strengthening" euro.  This then allows the ECB a chance to print and bring the euro down when the dollar gets too weak making the euro too strong, thus maintaining a perceived balancing act for public confidence.  They can seesaw this back and forth and drag this out much longer than if the dollar were on its own.  This only works because the euro affects so many people and acts as a second reserve currency.  We were stupid when we thought the euro and dollar would compete with each other.  They compliment each other.  Brilliant!  I hate those guys.

Mon, 04/16/2012 - 11:09 | 2348568 Ghordius
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"They compliment each other" Not complement? Congrats - useful way to look at it. Though this applies only to one phase of the current currency war. If we switch to a different phase you can throw all compliments overboard...

"blue bloods" I think it's not funny anymore how racially all basic thinking on the web seems to be nowadays - are you thinking about Churchill and his American mother? How about shared "national interests"?

Look it once this way: before WWI/II, France and the UK had vast colonial empires and the UK had the global reserve currency. Now just tell me who is "running the show" and "how we got there".

In case you are interested, my suggestion is to get some historic background, read up critically on the Spanish-American War and on the Suez Crisis, then just wonder for a moment why so many GIs were in Vietnam - a frigging previous French Colony called French Indochina until Roosevelt forbade the French to reacquire it...

Mon, 04/16/2012 - 16:29 | 2349673 bshirley1968
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You can drop the racial dribble.  I used the term "blue bloods" to describe the hierarchy that has existed for hundreds of years not only in Europe but England as well.  You know, that serf thing where people are born to a class of society that they never had to earn.  I really don't give a rats ass who is "blue" and who is not.  It is one of the main reasons we left that screwed up system to come here where a man's wealth used to be based on his efforts, skill, and desire to take risk.  Those days have obviously gone and the uber-wealthy class has established itself here and has found ways to earn off the backs and sweat of others, buy political power, pass laws to insure their wealth and income, and basically turn the system into a pseudo-european, socialistic, I-have-more-than-you-because-of-who-I-am economy.  Race "ain't" got anything to do with it, baby!  It's just pure greed being allowed to run rampant.

Mon, 04/16/2012 - 17:03 | 2349795 Ghordius
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ok, so we both cut on the racial dribble, since you explained that with "blue blood" you mean "old money". which is usually not that greedy as "new money"

Mon, 04/16/2012 - 16:34 | 2349696 bshirley1968
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BTW.  What part of the European continent is not a bunch of inbreds anyway?  The upper class has been trading daughters, sons, wives and husbands for centuries to gain more money, land, and political clout.  When we use the phrase, "would sell their own mother" its you euro freaks we have in mind.  So British, French, German, etc. genetically you are all the same.

Mon, 04/16/2012 - 09:58 | 2348332 Mario55
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After all, if you are scared today, you still buy gold, US treasurys and BUNDS and Bunds are in euros...for the time being.

Mon, 04/16/2012 - 11:26 | 2348631 Ghordius
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in all scenarios I can imagine about an euro-breakup that the City of London could possibly achieve (cui bono?), no redomination of old German bunds appear. Why should they?

If any eurozone member ever exits, then only the new debt would be denominated in the new currency. Said it differently, the EUR can by design only be killed quickly by an hyperinflation.

btw, in general only Americans buy gold when scared - the rest of the world buys gold because they understand it.

Mon, 04/16/2012 - 11:30 | 2348640 Lux Fiat
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There are probably multiple reasons that the EUR/USD is not lower. 

However, I have to wonder if some of the strength is due to repatriation of overseas investments and assets by Euro banks that are in desperate need of cash, or in preparatory ring-fencing mode (i.e. get the assets on home turf before going belly up). 

Also, despite all of the EMU's issues, they are at least tacitly acknowledging that there are fiscal problems, and some countries are taking steps to address it.  Whether those steps are the correct ones is debatable.  At present, it seems the US is still in denial, at least publicly, about the depth of fiscal problems, and does not seem to be taking any concrete steps to address it. The EMU is trying to get all its members into a 12-step program, while the US keeps doing shots at the bar.  Who do you want driving you home?

Mon, 04/16/2012 - 12:06 | 2348778 Jack Sheet
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Hasn't anyone here read Rickards' "Currency Wars"? Oh bum?Ah! and Bernwanker want a dirt cheap dollar and will print like f**k  to keep the EURUSD above 1.30. Of course both currencies are circulating the toilet bowl at comparable angular veloxcities and trajectories so the USD will pull the EUR down with it into oblivion.

Mon, 04/16/2012 - 18:21 | 2349955 AldoHux_IV
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Fuck election years and let's start addressing what's wrong with the economy and its central planners and most of all this idiotic group think that QE is the only necessary tool going forward which it ultimately just hits the snooze button for an ever bigger crisis.

The writer of this post is no better than the other central banking scum and perpetuates the inbreeding of idiocy at this level.

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