In late July, Bundesbank President Jens Weidmann made a comment about being in favor of a rise in German wages. I was citing a Financial Times article, “Bundesbank Shifts Stance To Support Pay Rises.” The article opens with the line, “Germany’s Bundesbank has backed the push by trade unions for inflation-busting wage settlements …” I noted that it was Bundesbank Chief Economist Jens Ulbrich who called recent wage trends moderate, given the strength in the German economy. If the Bundesbank had capitulated on the wage issue look for ECB President Draghi to feel renewed strength in his efforts to weaken the EURO and placate French and European peripheries who have continued to complain about the impact from an overly strong EURO. (This was from the JULY 23 Notes from Underground).
Well today another cold day in July was revisited upon the markets as German Finance Minster Schaeuble reportedly said a lower euro would be beneficial to the German economy because of enhanced exports. Herr Schaeuble has been adamant in his opposition to loosening the budgetary rules to allow France, Spain and Italy more fiscal flexibility. It is very rare for a German finance minister to favor a weakening currency during times of prosperity and certainly zero interest rates. It raises the question if Germany has indeed capitulated to French and Italian cries for more stimulus in the euro zone. German acceptance of fiscal stimulus with an agreed real QE program may have been the reason for the European and U.S. equity rallies today. Attention should be paid to the idea of a weakened euro in response to agreed upon financial and labor restructurings.
What it will mean for European bond markets will have to wait until after the results of the AQR on Sunday, but rumors are rife that the results will mean that European banks will need to raise more capital and the burden on the ECB will become ever greater. Also, pay attention to how German domestic banks fare under the ECB stress tests. In the mind of Mario Draghi, turning the screws tighter on German financials may result in increased empathy from the Merkel Government on the pain being felt by the peripheral economies.
In addition to the Schaeuble comments, there was a Bloomberg article by Catherine Bosley titled, “SNB Stands Ready With Further Measures If Needed, Zurbruegg Says.” Governing Board Member Fritz Zurbruegg put markets on notice that the SNB will continue to defend its 1.20 floor for the EUR/CHF cross (currently trading 1.2070). He said, “There’s no discussion, we will with the utmost determination make sure that the minimum exchange rate is not questioned, either with unlimited purchases of foreign currency, and if necessary we will take further measures immediately.”
It’s an interesting time for the SNB to get aggressive in its jawboning of its ridiculous policy of supporting the Swiss franc against the euro. If the ECB does something inane as far as QE, how does the SNB respond in kind? The Swiss have tied themselves to a bank that is groping in the dark for its best policy. Complicating matters for the Swiss National Bank is the Swiss referendum scheduled for November 30. The Swiss citizens are being asked to vote on a national GOLD policy for the SNB. It is a three-pronged issue:
- Hold all of Switzerland’s gold reserves in Switzerland;
- Raise gold holdings to 20% of the SNB’s total reserves;
- Never sell gold ever again
It is the second point that can really cause great havoc for the SNB as it continues to increase its reserves in defense of its 1.20 EUR/CHF policy. The SNB has been openly opposing the referendum and Swiss business has also been politicking against the referendum’s passage. But the current Swiss policy of increasing the SNB‘s reserves in an effort to keep downward pressure on the SWISS FRANC can become very problematic for global markets. Remember, ECB QE automatically becomes SNB QE … yet again.
***Tomorrow morning the Bank of Canada will announce its rate decision at 9 a.m. CST. It’s expected that the BOC will keep rates steady at 1.00%. The most interesting part will be if Governor Poloz moves to remove “forward guidance” from future releases, which would be the beginning of other central banks dropping the language of “forward guidance” and truly becoming more data dependent without an authorized time frame.