28 Oct 2013
The euro will continue to gain as long as the policymakers shun aggressive monetary expansion
FXstreet.com (London) - If you want to see a chart that few of the Chicken Lickens of the world would be calling two years ago, the XAU/EUR chart of gold priced it euros is probably it. In the last six months, it has tumbled more than 25 percent from a high of EUR1,362.14/oz to a low of EUR927.64/oz.
Against the dollar, the euro has climbed steadily from USD1.2782 to it current near two-year highs at USD1.3779.
In yen terms the euro has added surged from JPY94.4649 on 25 July to its current JPY134.6930.
Two years after near USD2,000 gold, markets are seemingly fleeing from gold to the safety of fiat federalist euros.
But make no mistake, this is not a function of strengthening fundamentals in the Eurozone. Eurogroup President Jeroen Dijsselbloem’s bullish comments about Spanish recovery this morning were pure Eurospeak and summed up Eurozone policymaker attitudes, focussed on improved bank capitalisation as a measure of an improved economy rather than drastic supply side reform.
On the credit side, within the worryingly sluggish loans to non-financial corporates and to individuals numbers for the Eurozone, Spain was the worst of the lot. Which will not be news for anybody hoping to see robust improvement in Spanish job creation.
The last round of numbers showed Spanish unemployment had nudged down from 26.3 percent to 25.98 percent month-on-month. But the small improvement seen in the Spanish labour market over the last three months has mostly come from temporary and part-time jobs in the tourism industry, up by 123,900. At the same time, the Spanish economy shed 20,000 private sector industrial and manufacturing jobs.
But relative euro strength has not come from fiscal discipline within the Eurozone or from market benediction of its ostensibly successful propping-up of bad periphery banks and sovereigns. Instead it has benefitted from holding back on monetary expansion while the US and Japan has continued to embrace it.
Yesterday, Bank of Japan deputy governor, Kikuo Iwata reaffirmed the central bank’s commitment to ultra-loose monetary policy and on 30 October when the BoJ meets next it is expected to confirm its commitment to JPY7 trillion of asset purchases a month as it attempts to fight deflationary pressures. Iwata stated that the BoJ would continue bond buying until it reaches its 2 percent inflation target.
And despite some Fed taper talk earlier in the year, it now looks committed to its USD85bn-a-month asset purchase programme at least until its March meeting and likely beyond. With this month’s debt ceiling arguments simply postponed and given more time to fester with a temporary extension to 7 February, the dovish Fed is highly unlikely to remove support. And with Janet Yellen set to take over from Ben Bernanke when he steps down as Fed Chairman on 31 January, that dovishness will not be under threat. The ultra-dovish Yellen is a central banker in the same mould as Bernanke and will err on the side of caution as long as is possible.
The big risk to the euro’s position is Mario Draghi’s comments about the euro strength. But until the ECB pursues large-scale monetary expansion, it will be given a boost on relative soundness of the currency.
Against the dollar, the euro has climbed steadily from USD1.2782 to it current near two-year highs at USD1.3779.
In yen terms the euro has added surged from JPY94.4649 on 25 July to its current JPY134.6930.
Two years after near USD2,000 gold, markets are seemingly fleeing from gold to the safety of fiat federalist euros.
But make no mistake, this is not a function of strengthening fundamentals in the Eurozone. Eurogroup President Jeroen Dijsselbloem’s bullish comments about Spanish recovery this morning were pure Eurospeak and summed up Eurozone policymaker attitudes, focussed on improved bank capitalisation as a measure of an improved economy rather than drastic supply side reform.
On the credit side, within the worryingly sluggish loans to non-financial corporates and to individuals numbers for the Eurozone, Spain was the worst of the lot. Which will not be news for anybody hoping to see robust improvement in Spanish job creation.
The last round of numbers showed Spanish unemployment had nudged down from 26.3 percent to 25.98 percent month-on-month. But the small improvement seen in the Spanish labour market over the last three months has mostly come from temporary and part-time jobs in the tourism industry, up by 123,900. At the same time, the Spanish economy shed 20,000 private sector industrial and manufacturing jobs.
But relative euro strength has not come from fiscal discipline within the Eurozone or from market benediction of its ostensibly successful propping-up of bad periphery banks and sovereigns. Instead it has benefitted from holding back on monetary expansion while the US and Japan has continued to embrace it.
Yesterday, Bank of Japan deputy governor, Kikuo Iwata reaffirmed the central bank’s commitment to ultra-loose monetary policy and on 30 October when the BoJ meets next it is expected to confirm its commitment to JPY7 trillion of asset purchases a month as it attempts to fight deflationary pressures. Iwata stated that the BoJ would continue bond buying until it reaches its 2 percent inflation target.
And despite some Fed taper talk earlier in the year, it now looks committed to its USD85bn-a-month asset purchase programme at least until its March meeting and likely beyond. With this month’s debt ceiling arguments simply postponed and given more time to fester with a temporary extension to 7 February, the dovish Fed is highly unlikely to remove support. And with Janet Yellen set to take over from Ben Bernanke when he steps down as Fed Chairman on 31 January, that dovishness will not be under threat. The ultra-dovish Yellen is a central banker in the same mould as Bernanke and will err on the side of caution as long as is possible.
The big risk to the euro’s position is Mario Draghi’s comments about the euro strength. But until the ECB pursues large-scale monetary expansion, it will be given a boost on relative soundness of the currency.