Taper Vs Negative Rates – Not much to choose from, Sell EUR
Between the USD and the EUR, we have more than half the world of assets covered and the 2 most powerful central banks in the world, disputably.
If both central banks (not including BoJ) are going for inflation and thereby adopting loose monetary policies, then we should expect currency weakness, noting that it would be a deliberate and controlled weakness and not a loss of confidence induced weakness that other lesser central banks would invite for themselves if they took that path.
The analysts are now rushing to qualify the calls they made after the ECB policy meeting because the FOMC took the all the wind out of the sails and the investor really does not know how to react or allocate whilst the equity markets just carries on.
I see many of my peers all shaking their heads and saying the situation is insane and the central banks are barking up the wrong tree.
I am beginning to question if there is something that they see that we do not, that justifies their policy moves. And that something that we are not seeing is likely a very gloomy medium term outlook that warrants the current loose monetary policy conditions.
Now Draghi Says Unlimited Cash Through 2016 Is ECB Signal on Rates.
And the first reaction to the FOMC last week was not some company announcing expansion and a recruitment drive. The first reaction I noted was Rolls Royce launching a 1 bio GBP share buyback which is now a global trend as we have companies like Koh Brothers issuing bonds in Singapore concurrently with share buybacks.
Companies cannot find any reason to grow and are buying back shares instead of boosting the economy by expansion, research and hiring.
The case for Europe is increasingly precarious and I have turned bearish although we will be seeing asset rallies and mountain loads of bonds being issued.
The geopolitical threats of Iraq and Ukraine linger along with the structural problems the individual states face. This is evidenced in the Austrian bank, Hypo Alpe’s bankruptcy this year.
The Eurozone is likely to face discord amongst members after the recent elections for the EU Parliament brought in several anti EU parties.
I stick with my EUR carry trade call for now with a target for EURUSD at 1.35 and 1.34 in the next month.
The EURNZD (+2.8%), EURCAD (+1.5%), EURGBP (+1.3%) and, to a certain extent, EURAUD (+0.75%) have outperformed since the ECB policy meeting.
I know a few people who are allocating to EUR funds of late and trying to catch the potential asset inflation when rates turn negative.
Yet after Abenomics’ failure, I am just not sure if Europe can pull it off and there isn’t really much to choose from at the moment.