Draghi's Currency War Ceasefire Faces Test As Sweden, Switzerland, Norway Take Aim

Around an hour before Mario Draghi disappointed, underwhelmed, and under-delivered by failing to meet what the ECB’s Nowotny called “absurd” easing expectations, we said the following

So what, precisely is everyone pricing in, you ask? Well that’s difficult to say, but the market generally expects a PSPP extension of six months, a PSPP expansion of €15-20 billion in monthly purchases, and a depo cut of 10 or 20 bps. Anything short of those estimates is “hawkish” we suppose (how absurd is that?) and anything beyond that will be enough to make the Riksbank, the SNB, the Nationalbank, and the Norges Bank nauseous. 

We were of course referencing the fact that if Draghi had somehow managed to live up to the hype (which would have meant cutting the depo rate by something ridiculous like 30 bps and expanding the pace of monthly asset purchases by €20 billion or so in conjunction with a 12 month PSPP extension), Sweden, Switzerland, Norway, and Denmark would have once again found themselves behind the eightball in the global currency wars. Effectively, Mario Draghi could have forced the hands of his regional counterparts and could have also put quite a bit of pressure on Haruhiko Kuroda to prove that the BoJ is still the looniest loon in the Keynesian funny farm.

Prior to the ECB’s December meeting, Nordea's Niels Christensen said "Denmark will be forced to cut below -0.75 percent" if the SNB moves after Draghi. Nomura's Yujiro Goto and Jordan Rochester contended that the Riksbank was more likely than the SNB to cut, noting that "Sweden will likely to be proactive after an expected ECB decision [and there's a] high possibility of 10-15bps Riksbank rate cut.” “And let's not forget about the Norges Bank,” we said, who, at +0.75 still has some room to go before NIRP if Oeystein Olsen wants to use monetary policy to combat an economy struggling with "lower for longer" crude. 

Well, everyone needn’t have worried because Mario Draghi “only” cut rates by 10 bps, "only" extended QE by six months, and “failed” to expand the monthly pace of asset purchases. Everyone subsequently got some respite:

Now, the SNB (December 10), the Norges Bank (December 17), and the Riksbank (December 14) are all on deck and the question is whether they will use the Draghi’s “hawkish” lapse to get a leg up in the ongoing currency wars. 

“I don’t think we’ve seen the last of this trend,” Jes Asmussen, chief economist for Denmark at lender Handelsbanken told WSJ. “When I trained as an economist, negative rates weren’t in the textbooks. But that’s the world we live in now, and it hasn’t stopped turning,” he added.

Still, some are betting that between the Fed and the ECB, everyone has been given the all clear to implement a December cease fire. Nordea, for instance, no longer expects a 10bps cut from Sweden. The reason for the changed forecast: the Fed has telegraphed a hike, and the ECB disappointment on Dec. 3 has eased pressure on SEK. Similarly, SEB is sticking with its forecast that the Riksbank will cut on Dec. 14 but analyst Olle Holmgren told Bloomberg that he was “unsure before and even more uncertain about it now.” As Bloomberg wrote last week, “the overarching message is that central banks outside the euro zone now find themselves in an entirely different situation compared with just a week ago. For Denmark and Switzerland especially, the changed landscape means policy makers are now less likely to cut their benchmark rates below the extreme level of minus 0.75 percent that both countries have had to maintain since the beginning of the year.”

Still, not everyone agrees that the currency wars are over, or even at a temporary standstill. Swedbank says a cut from the Norges Bank may be in the cards as Norway “has to deal with a further slump in oil prices and close to zero GDP growth during 2Q and 3Q.” Meanwhile Bloomberg’s Richard Breslow had the following to say on Wednesday about the SNB: 

It was less than a week ago that rates futures were pricing in a full 25bp cut to the SNB’s 3-month libor target, largely seen as meant to be a direct response to the ECB. After the ECB cut by a less than the widely prayed for amount, expectations went to almost zero and remain in single digits. Price action in a market caught badly offside, shouldn’t distract from the fact that the ECB did ease

 

The best you can say about the economy is it has been relatively resilient despite the over valued currency. A fran(c)er assessment is that the economy is sputtering. GDP at 0% didn’t get better because of a hawkish ECB surprise

 

The SNB likes quarter point moves. If they do something tomorrow it would be a break from habit to do a tenner. The world gets negative rates, it’s bare-knuckles in a proper currency war

 

The SNB has another problem to consider. If the Fed fails to find a middle ground and either sets off chaos or overly succeeds in its dovish messaging, the franc may be in demand with renewed vigor

And here are some excerpts from Goldman's preview:

Broadly speaking, market expectations of the SNB's likely reaction to the ECB's December decision fall into two camps: (i) the SNB will seek to manage the consequences of the ECB's move or (ii) the SNB will undertake more aggressive rate cuts in order to get ahead of the ECB and ring-fence the interest rate differential.

 

In our view, the increasingly large (economic and political) cost associated with deeply negative policy rates (and provided the SNB sticks with incremental rate cuts of 25bp) raises the option value of waiting before engaging in additional rate cuts. Therefore, we think the Governing Board will view any further rate cut as a measure of last resort. The two-pronged monetary policy strategy offers a degree of flexibility in setting interest rates, and the SNB may wish to wait for the Fed to start normalizing its monetary policy in December before it ponders any additional measures.

The problem of course is that the eurozone recently fell back into deflation and economic growth is anemic. It's not at all clear that Draghi is done and indeed he telegraphed as much with last Friday's "well, of course" moment.

That means if "competing" central banks want to get out ahead of further ECB easing, now is the time to do it, so don't be surprised if you get still more monetary insanity out of Europe over the next 10 days. After all, we know that if you can catch Draghi off guard, he tends to crumble under the pressure:

"Europe’s negative-rate adventure has only just begun, and it is far from clear how it will end," WSJ wrote on Wednesday, before noting precisely what we said above: "The ECB’s negative deposit rate has helped bring down the value of the euro, but Europe’s economy still musters only meager growth, and inflation is still stuck near zero." 

To be sure, it's not clear how much longer banks can hold out in the NIRP regime without passing the costs along to depositors. As we reported late last month, Swiss lender Alternative Bank Schweiz will begin charging for deposits starting in January after NIRP cost the bank "its entire annual profit" during the previous year. Of course that's good news if you've got a mortgage. "In Denmark, thousands of homeowners have ended up with negative-interest mortgages," WSJ reminds us, a nod to what we first reported back in January. "Instead of paying the bank principal plus interest each month, they pay principal minus interest."

Where does all of this insanity end you ask? Nowhere good, and on that note, we'll close with one last quote from The Journal:

Is there economic salvation in negative rates? If central banks push deeper, will growth return? Or is the weird nature of negative rates a prelude to perverse consequences—to hoarding of cash, bubbles in assets like housing, and uncontrolled inflation?