Notes From Underground: Its a Very Cold Day In July … When Bundesbank Capitulates

The financial press is filled with articles about the recent EURO weakness. During the last week the EU currency has fallen about 1.5 percent. Many pundits have opined that it is the Ukraine situation and Gaza that have made investors uneasy, thus the move into U.S. dollars. In a July 22 Bloomberg article, “Draghi Cedes Euro Control to Yellen on Fed Bets,” it is suggested that the DOLLAR is rising in anticipation of moves by the FED, especially now that the ECB has gone to negative yields on reserves. The problem for the Fed argument is that yields in the U.S. have actually softened during the last week and Fed communication has been muddled over when interest rates might possibly rise. When the ECB announced a negative interest rate June 5 the EURO/DOLLAR made a low of 1.3503. Today we are trading at 1.3465, a little below the 1.35 low but well below that day’s close of 1.3650.

If it is not Russia, Gaza, or higher U.S rates guiding the euro lower than what other element could be affecting investors? If I would venture a guess it would be in an article in yesterday’s FT: “Bundesbank Shifts Stance to Support Pay Rises.” This is a 180-degree turn for the backbone of European monetarism. A couple of weeks ago, Bundesbank President Jens Weidmann made some statements in support of Mario Draghi’s recent actions to ease rates and enhance liquidity to prevent a further drop in inflation and, of course, the euro. I thought Weidmann’s comments were of a political nature so as to not upset Merkel and the EU establishment in times of negative yields.

But the FT article takes the Bundesbank statement to a new level and must be a sign that even in Germany the economy is starting to slow. The article opens with the line, “Germany’s Bundesbank has backed the push by trade unions for inflation-busting wage settlements ….” It was Bundesbank chief economist Jens Ulbrich who called recent wage trends moderate,given the strength in the German economy. If the Bundesbank has capitulated on the wage issue look for ECB President Draghi to feel renewed strength in his efforts to weaken the EURO and placate the French and European peripheries who have continued to complain about the impact from an overly strong euro.

The only problem for the ECB and Draghi is that Janet Yellen will be attentive to the Bundesbank call for wage increases and use it as a reason to keep U.S. interest rates low for as long as possible to ensure a recovery in U.S. wages. If the Bundesbank can push for some increased wage inflation, then full speed ahead in the efforts to remove the drag of low stagnant wages for American workers.

***Tonight, the Reserve Bank Of New Zealand raised the Overnight Cash Rate (OCR) to 3.5 percent from 3.25. The KIWI currency though declined in value as the market shrugged off higher rates, an unusual response in the face of global zero interest rates. Governor Graeme Wheeler noted in the release that “with the exchange rate yet to adjust to weakening commodity prices, the level of N.Z. dollar is unjustified and unsustainable and there is potential for a significant fall.” We have heard this before from the RBNZ governor but this time the KIWI actually reacted by selling off rather than rising in the face of higher interest rates, something to be watching. The KIWI is a favorite of the carry trade investors from Japan and if the N.Z. dollar fails to react positively to higher rates, carry trade investors may begin to unwind long-held positions.

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6 Responses to “Notes From Underground: Its a Very Cold Day In July … When Bundesbank Capitulates”

  1. Chicken Says:

    I’m convinced the real story describing the future is to be found behind a curtain somewhere and what is said in public is misleading, at best.

  2. ShockedToFindGambling Says:


    BUBA position doesn’t make any sense to me. With the economy questionable in Europe, raising wages will lead to lower profits and less hiring.

  3. yra Says:

    Shocked—i am as perplexed as you but that is why I called attention to it and it syncs with recent comments from Weidmann about recent ECB actions and he is in full support—a big part of my trading is seeing things that don’t register as ordinary behavior and measuring the markets response

  4. Lou Baron Says:

    In real estate I always use this argument when a tenant starts negotiating rent with me: “Sure you will save $1,000 per month by renting the cheaper space in the less active part of town, but your sales will be lower and your profit may drop by more than $1,000 per month.” Typically they stay. So basically it is the old adage of making it up on volume. I think Walmart, at least in part, capitalized on this. So could German companies pay more in wages and end up “locating” in a better neighborhood (economy) and also end up with a better bottom line? When companies are broke or nearly broke, sure, my argument won’t fly. But balance sheets I believe are pretty strong at the present and so I think the idea of higher wages to stimulate the economy might bear some consideration. After all, some think that too-low interest rates are not good for the markets or the economy, and maybe wages that are “too low” aren’t good either … just a thought to stir up some comments. (For me, half the fun of “Notes From the Underground” are the comments.)

  5. yra Says:

    Lou—it is a good point and is probably what is playing out in German thinking as the German workers have born the price of the Hartz 4 that began under social-democrat Gerhard Schroeder—the Bundesbank realizes that with German economic growth a boost to previous stagnant earnings is a potential boost to the domestic economy and will help to make the peripherals more competitive—as for NOTES i would hope that ideas generated here proved a boost to the bottom line.The Bundesbank support for higher wages will also embolden Janet Yellen in her efforts to get U.S. wages up and with it profits will have peeked as a percentage of GDP which is not a bad thing—sorry all the wild eyed equity bulls.

  6. Chicken Says:

    Isn’t a stronger currency the equivalent of a salary increase?

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