United We Stand, Divided We Fall – Central Banks Breaking Ranks, EURUSD Breaking Bad
I am not sure which planet some private bankers are from but I am seeing headlines that Yellen is dovish in the in-box whilst strategy pieces that are meant for distribution only to professional clients and US clients with 50 mio AUM are saying something else, that we are seeing a transatlantic gap in monetary policies.
A long time ago, central banks had to act in unison in tackling a great global financial crisis that threatened the economic well being of the world and of course, some people more than others.
The great central banks of the world are the G3 – Federal Reserve, ECB and BoJ. When they are in agreement, the world has a common goal.
At last week’s Jackson Hole symposium, Yellen presented a ruddy picture of growth and signaled intentions to dial back their policy accomodation whilst Draghi painted a dim view of Eurozone progress indicating a potential for further stimulus from the ECB. (Note that this is the first time a Fed and ECB chairperson were present at Jackson Hole since 2011)
What happens when views digress ?
Things fall apart;
the centre cannot hold;
Mere anarchy is loosed upon the world. ~ William Butler Yeats
We are at the cusp of that moment, I suspect, although the market is maintaining a semblance of calm.
The trades of the week in the in box are all FX led, Short EURUSD, Short GBPUSD and buy USDJPY.
My Greenback DXY trade is looking good and halfway towards target of 84, it is at 82.5 now (vs 81.5 12 days ago) https://tradehaven.net/market/fx/fx-views-the-greenback-comeback/
Mindsets take a long time in changing but the signs are there as we see the DXY index approach its 12 month high.
The market is however heavily positioned on the short EURUSD trade and many are also switching into EUR carry trades like the EURAUD.
It will end in tears of joy ultimately if the trajectory sustains. Take a look at the table of fx performance against the USD over the past 2 days.
EUR has depreciated 4.17% against the USD year to date and the EM carry trade remains strong against it.
The prospect for EUR is frightening and I have some chart experts warn me of 1.28 in due course which would look like this.
If we remember the years of 2008-2012 and the havoc that QE or non QE raised, you would have witnessed the 1.20 to 1.40 moves within a 6 month time frame.
Now that we are the crossroads of policy divergence, the prospects of EURUSD “breaking bad” return with a vengeance.
Ps : I personally expect major repercussions on the other asset classes too but I have not had time to think through my views.
In the meantime, I also expect EM currencies to head to a show down in the coming month before the end of tapering in Oct.