“The outlook is getting worse and worse”, Mario Draghi said Thursday, after the July ECB statement showed the Governing Council is, as expected, considering a variety of options for how to structure an easing package to be delivered in September.
The euro fell to a two-year low, before bouncing aggressively as Draghi regaled reporters. “There is no 2% cap”, he insisted, expressing more than a little frustration at how stubbornly low inflation expectations have been.
“[They’ve] thrown the kitchen sink in” for the September meeting, CIBCs head of North American FX strategy, Bipan Rai, said.
The single currency’s about face appeared to come when Draghi said a rate cut wasn’t discussed this week and that any future cut would come with mitigating measures. Basically, some argued Draghi didn’t deliver a sufficiently forceful follow-through from the statement to the press conference.
Thursday’s “chop” notwithstanding, the euro should continue to labor under the weigh of expectations for aggressive easing. The overarching message from Thursday was that the ECB is headed back down the accommodation rabbit hole in September, likely with some manner of package that includes rate cuts, enhanced forward guidance and a restart to net asset purchases.
This of course comes against a backdrop of deteriorating data in Europe, with an emphasis on Germany, where a deepening manufacturing slump threatens to push the bloc’s largest economy into recession.
Assuming trade tensions between Europe and the Trump administration eventually flare anew (which they almost certainly will in the interim, even if things are ultimately resolved), things could very easily get worse.
The worse things get, the more inclined the ECB will be to ease, and the more dovish they lean, the more irritated Trump will become. It’s probably just a matter of time before the US president weighs in on today’s ECB proceedings in a similar fashion to his infamous “Mario D.” comments following Sintra.
One person who is convinced that Trump will lean into the currency wars is SocGen’s Albert Edwards, who earlier this month predicted America’s irascible commander-in-chief will “take things to a whole new level“.
In his latest weekly missive, Edwards weighs in on all of this.
“July’s German manufacturing PMI released yesterday was simply awful, dropping to a cyclical low of 43.1 [just] 0.1 above the July 2012 nadir of 43.0 seen at the height of the eurozone crisis”, he writes, on the way to exclaiming that “We are close to having a 30 handle!”
Indeed we are.
He goes on to ask if we’re on the verge of seeing “another eurozone crisis”. After all, he observes, “it’s not just Germany in difficulties”.
This gives Albert an opportunity to reiterate that Trump won’t stand idly by as deflation makes its way across the Atlantic.
“As ECB easing resumes, the next phase of the currency war will explode to life as President Trump explodes in anger”, Edwards writes. We’ve shown you some version of the chart below before, but it’s worth highlighting again for the occasion.
(SocGen)
Edwards notes that the eurozone could avert a currency war by boosting the fiscal instead of the monetary link, but says “misplaced ideology” makes that unlikely.
As far as Trump goes, Albert says that “one of the key lessons” he gleaned from “following Japan’s inexorable slide into the deflation quicksand was that having a persistently strong yen accelerated the process”. Trump, Edwards believes, will do anything and everything to avoid falling into the same trap.
“He should not and will not accept a stronger dollar”, Edwards insists. “I expect unlimited unilateral FX intervention to drive down the dollar. And I expect it soon”.
Hi to all.
“There are contrarian indicators and then there are contrarian indicators – and then there’s Albert Edwards, the pessimistic Societe Generale market analyst who thinks his dethronement as the top-ranked advisor in one survey is a sign that investors ought to watch.
In an analysis both cheeky and self-deprecating, the longtime market bear laments his loss of standing after 15 years on top in the European Extel poll and figures it must mean that the record-breaking bull market run is coming to an end. Edwards’ team at SocGen ceded the top spot for global strategy to a JP Morgan team led by Mislav Matejka.”
https://www.cnbc.com/2019/06/05/socgens-albert-edwards-says-his-loss-of-top-strategist-is-a-market-signal.html
At the risk of bridging forums , I call attention to H..”s post on SA this morning… Eloquent as that was it was an argument that was strongly rooted in Philosophy .. Because this time if it is not different it is an outlier at the very least and because of this it is what inspires conspiracy theories . As I noted in past musings sometimes reducing things to basic elements help separate forests and trees…. That having been said when the going gets as confusing as it has been even the most elaborate explanations such as Charlie M can stand a pretty good chance of failure because the power of CB’s is yet to be tested…..
It might be that we for a short time are going to drift from the world of reality to a world dominated in Metaphysical reality..The flaw in all what I say here is that “short Time” is not defined..We live in interesting times !!
My question is whether any intervention in the currency markets can really be expected to have long term effects. I’m sure traders will get burnt when they are surprised. But I question whether it will make a difference over the course of several months.
I suppose one way the government could effectively make the dollar weaker would be to drop the tariffs, which should make other currencies appreciate.
I also wonder about his comment that the Europeans should use a fiscal stimulus. Are they well organized enough to coordinate a fiscal stimulus?
Currency intervention after a short period works only if others cooperate and if there are also fundamental changes in policy to match. Do you think EU, Britain, and the rest of the world want to cooperate with America First? Do you think the US is capable of tightening fiscal and loosening monetary policy in a sound planned way? If you do then the intervention will prove successful. If not, which is likely, currency intervention will only serve to lose the US Treasury funds. It seems increasingly likely that we are going to face a significant slowdown within the next few quarters, a slowdown that can morph into a recession with even a small shock. It is highly likely this shock will emanate out of the corporate sector due to bad lending and overleverage of balance sheets. Beware the stock jockeys touting “valuation”.