Notes From Underground

Today, French President Francois Hollande called for a managed currency rate for the EURO. It seems that the French are now concerned that the euro is too strong for its fragile economy. The problem is that as long as ECB President Mario Draghi is happy with a stronger euro the French are in a difficult situation. I have argued that a “strong” euro placates the German hard money crowd. All of the ECB‘s monetary policies have stabilized the break-up risk of the EU while not subverting the currency’s value. Mario Draghi can tell the Germans that his policies are being supported by the market and thus keep Bundesbank President Weidmann at bay. While the BOJ, BOE and the FED have had to actively enact QUANTITATIVE EASING, the ECB has actually seen its intervention contract as money has been paid back and collateral returned. (See last week’s repayment of the LTRO funds.) While the YEN, POUND and DOLLAR have been sold by the market, the EURO has attained star status.

This recent rise in the EURO has allowed President Draghi to sit patiently and wait for the QE policies of the major central banks to ignite growth and allow the fragile economies of Europe to muddle through its present crisis of zero growth. While the ECB has promised that it is ready to enact Outright Monetary Transactions (OMT), the market has allowed Mr. Draghi to keep his powder dry and not demanded actual bond purchases since the late-July crisis. As the YEN has depreciated and the EURO appreciated, the French economy has come under renewed pressure, forcing French President Hollande to call for a managed rate to prevent further appreciation. As Mr. Hollande said: “The Euro should not fluctuate according to the mood of the markets.” However, German Economic Minister Phillip Rossler retorted to the French call for managed rates with a terse “… strengthening competitiveness rather than weakening the currency.”

The Germans want a strong currency to prevent inflation and wish to see the crisis-plagued European economies undergo major reform. It was Germany’s Hartz IV compact that led to a major reform of Germany’s labor market under Chancellor Gerhard Schroeder. What the Germans conveniently forget–but the French well remember–is that while Germany was undergoing major economic restructuring, the ECB held interest rates low allowing the EURO to fall t0 0.8225 from 1.20. This softened the blow of German wage retrenchment by helping rev up the German export machine. This is the problem for President Draghi: German intransigence versus the desires of France’s grand illusion of the ECB again aiding the depreciation of the currency. The French want the ECB to provide it with aid and comfort, and will appeal to the Italians and Spaniards for support in this endeavor. Oh well, Mario, you will always have Davos.

***The Reserve Bank of Australia (RBA) held interest rates steady at 3% last night. The market’s response was muted although the AUD/KIWI cross continued its downward momentum. The Aussies continue watching global developments before initiating any unilateral action. The RBA still believes there is too much uncertainty in Washington and Brussels to move rates higher and they seem to want to wait for further proof of slowing before cutting rates.

***Swiss National Bank member Fritz Zurbruegg spoke today and let it be known “… negative interest rates in form of policy rates are definitely not on the cards in Switzerland.” The SNB will continue to hold rates at zero and will wait for global economic growth to increase before there is any return to interest rate normalization. The SNB is happy that the EUR/CHF cross is well off the 1.20 floor as it hit 1.2575 last month. The issue is that regardless of what the SNB does with its official rate, any renewed turmoil in the European peripheries will initiate market action to take rates negative. The present complacency is allowing many policy makers to exercise their vocal cords.

*** If the Japanese are going to maintain the aggressive policy of YEN weakness, they are going to have to reinstate the nuclear plants. The bill for imported energy is going to increase dramatically as the YEN weakens. Oil, priced in terms of YEN, is at two-year highs and if the global economic recovery gains momentum the price of oil will increase driving up Japan’s energy bill. We will be alert to Japan ‘s energy policy as indication of currency intentions.

***In an important piece–“European Authorities Still Punishing Greece: Can They Be Stopped?”–Mark Weisbrot of the Center for Economic and Policy Research takes the European authorities to task for the crucifiction of the Greek people on a EURO CROSS (reference William Jennings Bryan). While some of my readers may scoff at citing the leftist oriented CEPR, this blog has no ideologically bent but supports quality research wherever it is found. Mark’s partner at the CEPR, Dean Baker, did some of the best work on forecasting the housing debacle and many people would have done themselves well by having read it in real-time. (An aside: Mr. Weisbrot is a long-time friend and college roommate.) The article cites former IMF economist Arvind Subramanian, who made a “compelling argument last year that if Greece left the Euro its economy might well recover so rapidly that other countries would want to leave, too.” This article is an important read as it revisits a view that has been laid dormant by the “DRAGHI PUT.” Present complacency is not a guarantee of future calm (Hyman Minsky).

Tags: AUD/Kiwi, BOE, BOJ, Dollar, Draghi Put, ECB, EUR/CHF, Euro, Fed, Francois Hollande, Mario Draghi, Pound, QE, quantitative easing, RBA, SNB, Yen

This entry was posted on February 5, 2013 at 8:24 pm and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.