There is something fundamentally wrong in Europe if the ECB follows a three per cent inflation announcement with a 25 percentage point cut. The hype of the previous week’s euro summit got the wind knocked out of it as central banks departed from market expectations, the fed holding steady despite “significant downside risks” and Draghi cutting at his first conclave amid “mild recession” expectations. More importantly, unanimity in the euro decision betrays real recessionary fears across Europe, with Bundesbank hawks also softening opposition, probably banking on inflation fizzling out with slowdown growth.
The euro’s week-long drop from 1.4170 to 1.3789 speaks of more than just the paralysis in Greece. It has never been about saving Greece, a standpoint gaining currency with the spread of anti wall street and anti austerity dissent across the world. Europe’s financial elite remains obsessed with preventing a violent unwinding of its leading banks, with heavy exposure to distressed PIGS economies. Hence the complementing downward pressure on cable, with British banks likely to figure prominently in any potential domino effect featuring hemorrhaging European financial institutions.
The landmark euro summit failed to bid the single currency to the significant 1.4250 resistance, but the call to short was spot on. Watch for more weakness as the debt drama spreads. Papandreou may have survived the confidence vote, but the seat of government in Athens is no longer significant. All decision-making has moved to the troika, and any subsequent coalition will face the same problems, and the same public resistance to austerity. The ECB’s refusal to remain ‘lender of last resort’, the IMF’s inability to generate consensus on increased funding, Draghi’s surprise rate cut, incrased rioting across the continent, rumours of Germans printing deutsche marks, all combine to deliver the kiss of death to the euro. Stay committed to the long-term short. Failing a game-changer, the euro does not have much life left.
Finally, the collapse of the G-20 summit and fears of further risk aversion and safe haven trading pushed the Japanese to intervene, strengthening the dollar almost five per cent on Oct 31. Already, scrambling from crisis to crisis, pundits have seemingly lost sight of the harm recessionary tendencies in Europe and the US are doing to the currency market. If weakness in suffering economies pressuring currencies of more stable ones wasn’t bad enough, interventionist positions are setting precedents that will ultimately result in currency rigidities. The Japanese and Swiss both came under intense pressure from export lobbies, and following both interventions, the greenback is the only safe haven refuge left. That makes for more complications with US unemployment easing, albeit only slightly, major markets ending lower despite the ECB rate cut, and US ISM still above 50, although slightly below expectations. This is no time to trade the yen, franc or cable, except in sharp, targeted, intra-day adventures.
Commodity currencies, too, have begun losing confidence in the turnaround narrative, with the Aussie dollar recording its first weekly fall since September as the country’s central bank cut its key interest rate by a quarter of a per cent. As noted repeatedly, windows of risk appetite have become increasingly short-lived, and weekly trading will reflect a resumption of the epic battle of uglies, with prudent shorts eyeing weakest links providing the most gains for eager traders. Europe will dictate currency market movements for the foreseeable future.