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The Raging “Currency Wars” across EuropeGary Dorsch The theater of the absurd became even more bizarre on Jan 22nd, when the European Central bank (ECB,) desperate to extract the Euro-zone’s economy from the quagmire of deflation and stagnation, decided it would try its hand at the magic elixir of “quantitative easing,” (Q€). Starting on March 1st, the ECB will inject €60-billion of liquidity into the Euro-zone’s money markets, each month until the end of Sept 2016. The ECB is the last of the Big-4 central banks to unleash the nuclear option of central banking – QE, - starting about six years after the Bank of England, the Bank of Japan, and the Fed began flooding the world markets with $7-trillion of British pounds, Japanese yen and US$’s. Proponents of QE argue that the UK and US-economies are among the best performing in the developed world today, and say the massive doses of money printing and near zero interest rate policies (ZIRP) are the main reasons why. Opponents of QE say the liquidity injections are mostly channeled into the bond and stock markets, - enriching the owners of financial assets, and very little of the QE-injections “trickle down” into the hands of the struggling masses. Instead, thanks to QE and ZIRP, the net worth of the world’s 400 wealthiest has mushroomed to a cumulative $4.1-trillion. The Richest 85-billionaires now control more wealth than half of the world’s population combined, or 3.5-billion persons. Many of the world’s ultra-wealthy were in attendance at the World Economic Forum in Davos, Switzerland this month, dining and conversing with the most powerful central bankers and finance ministers from around the world, and getting a few “hot tips.” Also in attendance, was the Bank of Japan chief Haruhiko Kuroda who welcomed the prospect of the upcoming “Tug-of-War” with the ECB over the direction of the Euro/yen exchange rate. “We very much welcome this QE action by the ECB,” Kuroda said in Davos. “The decision could end deflationary pressures and stimulate growth in Europe, which is good for the economies of Japan and the world,” Kuroda said.
However, when translating Kuroda’s jargon into plain English, what he really said to investors was; “The ECB’s decision could end deflationary pressures (ie; reduce selling pressure in the Euro-zone stock markets), and stimulate growth in Europe (ie; inflate EuroStoxx valuations and P/E multiples), which is good for Japan (ie; owners of Tokyo listed equities) and the world (ie the Richest-1%). On October 31st, 2014, the BoJ jolted the world stock markets sharply higher, when it stated its intention to buy ¥80-trillion of Japanese government bonds over the next 12-months, which means the BoJ would soak up all of the new bonds that the Ministry of Finance sells. The BoJ ramped-up its QE operations the same day the Fed mothballed its QE-3 scheme. The BoJ already holds about 20% of Japan’s outstanding government bonds, and if it continues to underwrite the entire deficits of the government, it could end up owning half of the JGB market by as early as in 2018. BoJ chief Kuroda says the massive printing of yen, - dubbed “QQE” in Japan is necessary to prevent a reversal into a “deflationary mindset,” that has stymied Japan’s economy for decades. “Countering such a trend is the most important thing we can do. Whatever we can do, we will,” Kuroda said. Reading between the lines, the “deflationary mindset” that Kuroda aims to turn around is the Bearish psychology that has plagued the Tokyo Stock Exchange for more than two decades. Since the BoJ unleashed QQE in Dec ‘13, the Nikkei-225 stock index has doubled in value to above 17,500-points, - thanks to a -50% devaluation of the Japanese yen versus the US$. ECB Ups the Ante against the BoJ; For almost two years, inflation has been consistently below the ECB’s target rate of +2%, with each month showing a lower figure than the previous one. More than six years after the collapse of Lehman Brothers and the start of the “Great Recession,” conditions are still at Depression-like levels in the peripheral countries of Europe, with double-digit unemployment rates, and ever-lower living standards and rising poverty that have become a permanent situation. Reflecting the deeply entrenched trend of deflation, the yield on Germany’s 5-year schatz turned negative on January 15th, to as low as -5-basis points (bps), before rebounding to +1-bps today. As such, the ECB unveiled its most aggressive effort to date to revive the region’s ailing economy (ie; inflate the EuroStoxx index) with a QE-scheme to print 1.1-trillion Euros and purchase government and private bonds starting in March. Thus, the BoJ and ECB will engage in hand to hand combat the Euro/yen exchange rate in the year ahead. Initially, the BoJ gained the upper hand over the Euro/yen exchange rate, when it struck first, with a surprise attack, by expanding its QQE scheme to ¥80-trillion/year. That act of “shock and awe” lifted the Euro to as high as ¥150 in December. However, the ECB quickly retaliated by driving German T-bill rates to zero percent, and -16-bps below Japanese T-bill rates. And of course, the ECB has upped the ante, by playing the Q€1.1-trillion -Q€ card, and in turn, knocked the Euro sharply lower to ¥130 last week. German firms are competing head-to-head with Japanese firms in the $3.4-trillion capital goods export market, and the central banks have the advantage of being able to move quickly. Politicians always turn to central bankers and say, “Can you fix it? Put some cheap money out there.” Together, these two heavy weight central banks are planning to inject a combined ¥10-trillion and €720-billion into the world money markets in one year’s time. But there is no quick fix.
Switzerland Stuns Markets by Giving Up on Currency Peg; On January 15th, the Swiss National Bank (SNB) shocked the markets, in one of the most memorable days in the history of currency trading. The SNB swept the rug from under the feet of currency, debt, and equity traders alike, when it decided to abandon its defense of the Euro versus the Swiss franc. The SNB’s sudden withdrawal from the currency wars, sent the Swiss franc soaring by +20% within a few minutes, a move that rippled through global markets and wiped Sfr-155-billion off the value of the Swiss stock market. The SNB scrapped its defense of the Euro at 1.20-Swiss franc, just days after SNB officials said the currency peg was absolutely necessary, to fend off deflation and a recession. SNB deputy Jean-Pierre Danthine said on Jan 12th that the 1.20 ceiling would remain a “pillar” of monetary policy. “We took stock of the situation less than a month ago, we looked again at all the parameters and we are convinced that the minimum exchange rate must remain the cornerstone of our monetary policy,” Danthine declared. Earlier, on Jan 5th, SNB chief Thomas Jordan said the currency peg as “absolutely central.” Since introducing the currency peg in Sept ’11, the SNB had printed roughly Sfr-400-billion and used to buy Euros and US$’s. As of Jan 14th, its foreign currency reserve had increased to a record Sfr-495-billion, or equal to 85% of Switzerland’s GDP. Then, the gig was up. The SNB realized it was not possible to match the ECB’s forthcoming €1.1-trillion Q€-printing spree. To counter the ECB, the SNB would have to print Swiss francs equal to 2-times the size of Switzerland’s annual GDP.
In Zurich, the SNB’s defense of the currency peg had in essence, become a quasi QE-scheme. Much of the 400-billion of Swiss francs that were injected into the foreign currency market, filtered into Swiss bonds, (pushing the Swiss 10-year yield below zero-percent last week), and into blue-chip Swiss stocks. However, when the SNB suddenly went cold turkey on quasi-QE, and abandoned the Euro/franc peg, it triggered an instant reaction of panic. The Swiss Market Index (SMI) tumbled -15% lower to the 7,900-level. The two-day crash was the biggest since “Black Monday” in October 1987, and wiped out around 155-billion francs in market value. Morgan Stanley analysts wrote: “We estimate that 85% of SMI sales come from overseas, and many of the large-cap names generate 90-95% of their revenues from sales outside Switzerland. With the franc worth around +17% more than it was a day and a half ago - the franc is now nearly at parity with the Euro. Swiss companies must face the challenge of absorbing what amounts to a -17% reduction in revenue on every item sold in the Euro-zone.” The SNB’s retreat from quasi-QE also has far reaching consequences for 550,000 Poles, 150,000 Romanians, and many Croatians, who have mortgage debts denominated in Swiss francs, and now face +17% increases in their interest and principal payments. However, on Jan 18th, Switzerland’s finance chief Eveline Widmer-Schlumpf sought to reassure shell shocked investors that abandoning the currency peg with the Euro would not destabilize the Swiss economy. She predicted the Euro/Swiss franc rate would eventually rebound to 1.10. “I’m confident that the economy will be able to cope with this decision. Companies are in a far better position than in 2011 when the cap was introduced,” she told the SonntagsBlick and Schweiz am Sonntag newspapers. Sure enough, on Jan 27th, the SNB backed-up the finance chief, and issued a warning that it is ready to intervene in the currency market to support the Euro against the Swiss franc. “Giving up the cap means a tightening of monetary policy. We accept this, but only up to a point. We are fundamentally prepared to intervene in the foreign exchange market,” warned SNB deputy Jean-Pierre Danthine. He said it would take some time for the foreign exchange markets to balance out, and declined to give exact levels, the SNB is aiming for the Swiss franc versus the Euro and the US-dollar. Already, signs of stability in the Euro’s value at around parity with the Swiss franc was enough of a signal for bargain hunters to pick-up battered Swiss shares. With the SNB alerting traders that it is not completely walking away from currency intervention, traders bid-up the SMI +5% higher to the 8,400-level on Jan 27th, or +5% above the panic bottom lows. In turn, signs of stability for the Euro /franc led speculators to dump Swiss T-bills. The yield on Switzerland’s 3-month T-bill jumped to minus -118-bps on Jan 27th, from a record low of -260-bps on Jan 23rd. To read the rest of this article, please click on the hyper-link located below: http://sirchartsalot.com/article.php?id=198 ### Gary Dorsch 321gold Ltd |
