Do we want to call it a beauty contest for the most anorexic currency -with the sexiest appeal? Or should would avoid nicknames and euphemisms, and call it a self perpetuating currency war?
Branding is a very relevant activity in the real economy. Our central bankers were not going to be immune to its charm. When you put a sticker on a concept or a fact, you are actually working on the unconscious level of the listener, trying to tilt his perception of the issue. That´s the reason Guido Mantega is never invited to jet set parties after 2010, when he dared label what was going on in the USDCNH fix, as a “currency war”. How daring! Who allowed that guy in our circles? Where is he from anyway? Did you say Brazil?
That was only the beginning of the beginning. Later on, the U.S. allowed its currency, the dollar, to devalue vía expansionary fiscal and monetary policy. Through increased spending, implementing ZIRP (NIRP was not an acronym yet), and increasing credit and the money supply. Over time, they managed to drive the USDJPY to a level of 76. A few months later they took the EURUSD to an astounding high of 1,40 this year.
The Swiss were the next to join the fray. Starting august 2011, they put a 1,20 floor on the EURCHF, and bought foreign currency to the value of more than 60% of their GDP,. They were forced by the market to put their money where their mouth was. Central Bank omnipotence was not yet a motto. It was the first central bank balance sheet bubble in the series. No NIRP enhancement was needed. When things were looking ugly, back in august 2012, super Mario came all in, with his survival of the euro gambit and took everybody on board for the ride. They will never thank him enough. Gratitude is not only the greatest of virtues, but the parent of all others. Go ask Marcus Tullius Cicero.
The Japanese were late to war this time. Maybe the emperor was as reluctant to combat the US economically, as his antecessor was when the Pearl Harbor attack was being crafted. Abe and Kuroda realized that they were being priced out of the global market with an exchange rate of less than 80 to the dollar, and less than 100 to the euro. “Abenomics” was the euphemism to use this time around. It comprised a healthy dose of money printing, the continuation of ZIRP, and some currency bashing with the pretext of beefing up their inflation figures. Real wages and German and US exports would foot the bill. Germany and the US were not going to complain. After all, they had their own mischiefs to hide before becoming too vocal about it. Yen was to be reclassified to junk status (see may post). And japanese savers are being massacred. But don´t tell anybody. Nobody seems to know!
Europeans got finally fed up with the situation in view of the fact that worldwide deflation was being exported to them. Not that they cared much until German exports felt the pinch though. After all, French and Italian lack of competitiveness was their fault, no reforms were under way so it was a well deserved punishment for them. The virtues of having a Calvinist leader. We european periphereals deserved no less than Angela Merkel. The Spanish inquisition was certainly far worse. Humanity always progresses. No physical punishment this time around. Just a few “ninja” to cater for. Nothing a good old subsidy can’t alleviate.
So after a few months of public grumbling by the most mediatic figures of the ECB board, Europe decided to intervene. Wording became more explicit. Nearly pornographic: “the euro exchange rate is not a policy target, but it is very important for price stability (and we are brewing a deflationary problem)” said Dragui. And again. And again by Nowotny, or Mersh, or any other board member, speaking in full representation of the ECB. Warnings could have been louder but not more explicit. Our eurusd short piece dated June highlighted the issue.
At first Mario tried to pull the trick with words only. Oh, he is so good at that! But the market wanted some evidence. So he came up with NIRP, and suggested QE was coming.
His last intervention was really decisive. More NIRP plus one extra trillion in central bank money. Fast, not just slow monthly printing. He wants the balance sheet back to 3 trillion asap. Germany was in fact grinning behind the curtain, but forcefully voted against this outcome. An awesome actors studio representation. Does anybody belief the germans did not concede reluctantly behind the scenes? I don’t know what the deal was. But there was a deal. We shall learn about it someday. Thank god japanese cars were becoming too competitive.
Two days after the ECB meeting and press conference, Nowodny candidly stated: the measures were meant to devalue the euro to where it is (it was 1.2950 roughly), and, he added convincingly, it will stay there. Any doubts on the last missionary message in the commmon knowledge game we are all playing now? Not that it was not evident beforehand. Lets tale a look at real financial costs for NFC’s in Europe. Do you think 5 bps cheaper in base money makes a difference?
In the meantime, NOK and SEK had been readily guided to a 10% plus correction against the euro. Very discreetly, as in an extramarital affair, parities in EURNOK and EURSEK have been brought back to 2008 levels. ¿Really? If somebody had just landed from Mars, he would think nothing has deteriorated the euro outlook in the meantime. Do martians scratch their heads?
Central banks are overdoing their demand of faith in the common knowledge game. Economic faith is rapidly morphing into a religious one. Nothing short of that will allow me to believe those moves are garden variety. Long term, those two currencies are a strong buy in their euro crosses. But be wary of the central bank omnipotence. The bottom line is still that they are the ones keeping all this together. Probably not for ever, but certainly longer than you can remain solvent, unless you run the Bill Gates investment vehicle.
As I write this, SNB member Thomas Moser hits the tape confirming that NIRP is a policy option for the CHF. We learnt that they “remain open” to it. It is a timely and convenient follow up on the same message by his boss, back in June. As if we didn’t know. NIRP is now in all the central banks’ toolboxes. Thank you Thomas, for your kind update. It is of course a coincidence that somebody ran all the stops on the way to 1.2120 in the EURCHF. ¡Surprise! After a couple of days of market volatility, I do not think NIRP will do the trick this time around. Remain well long the CHF (see end of may eurusd post).
Junk yen has begun a new slide past the 1,0540 level (vs the USD). Not surprising. Some more people are beginning to realize the yen is not a safe haven. Maybe Jeffrey Gundlach’s presentation this week has helped correct the herd mentality a little bit further.
I will try to keep this short for once. Yes I´m kidding. My wife says I can talk underwater. I will refrain from comments on the CNY today. Currency war is multilateral now. It is really a global beggar thy neighbor strategy for the scarce and dwindling global aggregate demand. And it’s going to get worse. Jobs will not be forthcoming. Unemployment will get worse before it gets better (robotics), and real salaries are not going to rise meaninfully for some time. To frame this inequivocally, let me use and abuse Winston Churchills famous speech. I do not think it is the end yet. It is certainly, at least, the end of the beginning, and it could well be the beginning of the end.
So, yes, I think this has some time to go yet (most likely, its tough to be precise here). Money printing will continue for the next couple of months and NIRP will be extended as required by central bank omnipotence. It doesn’t look as if we are near the end, unless there is some external event that shatters the central bank omnipotence perception. Watch out for Scotland. A scot victory is not priced in, save for some sterling assets. Something tells me they will rock the boat for all.
Some ideas, in order to assuage our sexual (money making) needs in the meantime.
Corollary number one. Global aggregate demand is going to be the scarce element in the global economy in the foreseable future. Currency wars will continue unrelentingly. They will get worse. Tariffs and free comerce are next steps. A solid global aggregate demand is decades away, because we have to go through the say law process.
Corollary number two. Remain well short the euro. Everybody wants to devalue. Some have an underlying weakness to justify lower parities. Others don’t. In the event of double or triple counter NIRP’s by different currencies, the euro will be undoubtedly worse off. Avoid EURGBP shorts until the scottish issue is fully priced in. I am not comfortable with GBP longs anyway.
Corollary number three. Moderate to more intense (depending on your risk tolerance) USD longs. They are definitely done with printing. I don´t wee them involving in NIRP just yet. Janet promised Congress no more extreme monetary experiments in exchange for republican support. But remember, “in God we trust”, not the Fed.
Corollary number four. The yen is junk, because the country is bankrupt. Sell JPY strength, but keep on your toes, because it is against everybody’s interest to allow a fast depreciation of the yen. They worry about their solvency, the rest of us worry about their export franchise with a cheap yen. Others are also bankrupt, so the difference is beginning to be less substantial. Just take a close look at France. They are the frontrunner for the alternative most bankrupt candidacy.
Corollary number five. Capital controls could be nearer than we think. In some countries. Capital flight will be contained with regulatory measures next time. Dragui wording will not save the day twice. Remember: fool me once, shame on you. Fool me twice, shame on me. The euro is finally trash because France, Italy and Spain are finished (not to mention the rest of the periphery).
Corollary number six. Money printing is set to continue. Its effects are decreasing, but substantial amounts will continue to be printed by the ECB, the BOJ and the Chinese (credit expansion in this case). Steer clear of printing machines at work. We are close to the end, but money printing and NIRP might have some leeway yet. This chart by Zero hedge sums it all up (in money printing matters).
I´m down and out (but I hope somebody loves me). More money printing and more NIRP are the road to disaster. Waiting is tough, particularly when you see the train coming. Franz Kafka is one of my favorites on days like this:
“There is an infinite amount of hope in the universe … but not for us.”