It's time to start worrying about currency wars again.
Moments ago, with the EURUSD trading just shy of 1.19 and having risen above the "red line in the sand for corporate profits" 1.20 mark earlier in the week, the ECB again used its favorite trial balloon news service, Reuters, to suggest that not only is Draghi not in any rush to announce tapering (or tightening) of the European central bank's QE and/or NIRP (something last week's Jackson Hole confirmed all too well), but that with a growing number of ECB policymakers worried about the strong Euro, there is an increasing chance of a "more gradual exit" from asset purchases, Reuters reported:
- EURO CONCERNS INCREASE CHANCE OF DELAY IN QE DECISION, OR A MORE GRADUAL EXIT FROM ASSET PURCHASES: RTRS
- STRONG EURO IS WORRYING A GROWING NUMBER OF ECB POLICYMAKERS: RTRS
Some more details from Reuters:
Rapid gains by the euro against the dollar are worrying a growing number of policymakers at the ECB, raising the chance its asset purchases will be phased out only slowly, three sources familiar with discussions told Reuters. The scheme is due to expire at the end of 2017 but formal talks over its future are only beginning, meaning the European Central Bank is highly unlikely to take any decision at next Thursday’s rate meeting, the sources said.
Pressure is building for a gentle rather than a rapid reduction in the pace of asset buying from some policymakers, particularly in the bloc’s weaker economies, who are concerned that the strong euro could dampen inflation and hamper growth by making exports dearer, the sources said.
“The exchange rate has become a bigger issue,” one of the sources told Reuters. “It is now less favorable for an exit and a stronger argument for a muddle-through option.”
As the ECB prepares for what is its biggest policy decision in years, the worries over the euro show just how far it remains from achieving its goal of integrating the currency zone’s stubbornly divergent economies.
Germany and Northern Europe are ready to dial back monetary stimulus as their growth rates pick up, just as southern nations take on the added burden of uncompetitive exports on top of high unemployment. The debate also exposes the dilemma the ECB faces in trying to reconcile robust GDP growth with inflation -- which edged up across the euro zone to 1.5 percent in August -- expected to undershoot its target for years.
“The huge appreciation in the euro is already causing monetary tightening and is equivalent to an increase in interest rates,” another source said.
The ECB, which declined to comment to Reuters, has often said that exchange rates are set by the market and it does not target any particular level, although as 8 years of this nonsense have demonstrated that is pure nonsense. “You can’t have it both ways - a strong economy and at the same time a weak currency... You should also not call it euro ’strength’ but rather ’non-weakness’,” a third Reuters source said.
Of course, that won't stop the ECB from trying...
In any event, in immediate response to the news, the Euro tumbled to session lows...
... while Bund futures spike, now that the reduction in ECB stimulus measures has once again been delayed indefinitely.
And while verbal jawboning of the Euro is nothing new, this time the ECB has a hard limit: it is running out of Bunds to monetize: as such any meaningful extension of the €2.3 trillion scheme will run up against asset purchase limits that the ECB has itself imposed.
Without a change to the programme’s key parameters, the ECB could buy between 30 to 40 billion euros of bonds in the first half of 2018 but would be severely constrained thereafter, the sources said.
It could further relax a requirement to buy bonds in proportion to each country’s ECB shareholding, or include new asset classes such as stocks, as raised in July by one policymaker but not given consideration, or non-performing bank loans.
For legal reasons the ECB is unlikely to remove a cap that limits it to buying only a third of each country’s debt, as Draghi himself suggested in July.
Slowly but surely, the currency wars that marked the early part of the global central bank reflation experiment, appear to be coming back, and in the meantime, being short the dollar - one of the most profitable trades of 2017 - is looking like an increasingly dangerous proposition.