The financial world is awash in opinion on the overvaluation of the EURO. Even ECB President Mario Draghi has hinted that he is concerned about the deflationary impact of an overly strong European currency. It makes one think: George Soros solidified his position as the master of investment by breaking the Bank of England’s effort to hold the British pound at a pegged level that the market had determined was absurdly high. The PEG level was to be defended even it if meant bringing the U.K. into a very painful recession. The BOE even went so far as to raise overnight interest rates to 15 percent in an effort to raise the cost to speculators betting against the POUND. Rates were being raised even as the U.K. economy was in the midst of a slowdown. In a day known as Black Tuesday, the BOE and the Exchequer capitulated to market forces, in which George Soros held the largest position, and Britain stopped defending the indefensible. In two years time, the U.K. was in recovery mode with a devalued POUND and lower interest rates, while the remaining European nations tied to the Deutschmark peg were struggling to find economic growth.
While I’m not a fan of Mr.Soros, I noted in the book, “Inside The House of Money” that the U.K. ought to have placed a statue of Soros in Trafalgar Square. The markets forced a policy change in England that the policy makers were too fearful of undertaking because of the politics involved. If the EURO currency is overvalued and causing problems for ECB policy makers where are the speculative forces to deliver the desired result President Draghi is pushing. EURO short sellers have lost so much money during the last two years it leaves one to wonder what market forces are maintaining the strength of the euro. Questions of troubled banks, unemployment levels of 12 percent across the entire continent, Cyprus expropriating bank depositors with the EU finance chief calling it a template for future “bail-ins” and then throw in the Ukraine for geopolitical instability and the euro is still 138.50. HMMMMMMMMMMMM, is this a statement about the Dollar more than the euro? That is the fundamentalist conundrum.
***Tuesday brings an interest rate announcement from the Bank of Japan. The markets are expecting the BOJ to maintain its present policy of continued bond buying but does not expect any new drastic action until the BOJ has more time to measure the economic impact of the sales tax increase that went into effect April 1. Last night the retail sales figures for March were released and they showed robust growth, but that is a classic outcome of “intertemporal dislocation” as demand was brought forward before a price increase took place. This meeting is the second one in April as the last BOJ rate decision was April 8. The only problem with the consensus view of NO CHANGE in policy is that the YEN is stronger and the NIKKEI equity index weaker since the last meeting. The Japanese financial system could use a boost from its concern about ABENOMICS failing and it seems that the Abe government and BOJ are far too committed to creating inflation to stop BOJ action now. Check the YEN resistance levels as far more will be gained from a surprise–being short YEN–than if the status quo is maintained and being long YEN. But this is certainly a difficult terrain for all currency traders.
***Is globalization under threat? The effort by GE to acquire parts of the French conglomerate Alstom have been met by an alternative effort from the German conglomerate Siemens. The German company is trying to secure the energy parts of Alstom while transferring Siemens’s high-speed train division to Alstom in an effort to build European champions and politically protect jobs in Europe. The effort to save jobs in France and Germany’s role in securing a European single bank mechanism to backstop troubled banks gives Siemens home field advantage–it is their balls,bats and they hired the umpires. But building national champions in lieu of sound finance is a problem for the spread of the benefits of globalization. Blocking a transaction based on domestic political issues is always a problem. And, the U.S., Canada, Britain, France, China and others are all guilty of invoking “national interest” to encumber financial benefits. Now, about the rise of sanctions.