Macro: The Bottom Line (12/02/2013)

 

A Tale of Two Currencies

With US markets largely devoid of major developments due to the US Thanksgiving holiday, this edition of Macro: The Bottom Line will be short and sweet. We'll focus on the Euro and Yen, two currencies about to be driven lower by their respective central banks.

• Danger for the Euro - the ECB is becoming less German

• Yen - $70 billion per month is not enough 

Danger for the Euro - the ECB is becoming less German: Now, we understand that you've been reminded too many times on Red Bull about the dangers of the Euro. And yes, we still view the monetary union of 17 (soon to be 18) countries as dysfunctional and vulnerable to further existential crises down the road. But before we even get there, the Euro faces a more immediate danger: the European Central Bank is becoming less German. What does this mean? Well, though it's been in crisis-fighting mode for the past 3 years, the ECB has in fact refrained from QE. This was largely because of the influence of the Germans on the ECB Governing Council, who with their trademark inflation-phobia refused to join the Fed's money-printing club. Until now. With annual inflation in the Euro region now below 1%, it seems the ECB has decided deflation is now the greater evil. So now speculation has been rife that the ECB could unveil new measures - long-terms loans to banks, outright QE, or even negative deposit rates. Importantly, the Germans have been remarkable silent (whereas in the past they would've been loudly pounding the table at the first sign of money-printing). All this could play out very badly for the Euro.

Yen - $70 billion per month is not enough: The Euro is not alone in the danger zone. Its Far Eastern cousin, the Yen, could also be on the verge of further weakening. You see, even though the Bank of Japan (the central bank) has already been printing the equivalent of $70 billion a month with a goal of bumping up inflation to 2% within 2 years, it's become clear to several members of the BOJ board that it will likely miss its goal. Some have now come out publicly in favor of an even more aggressive monetary stance. What that will look like remains unclear. But one thing's for certain: there's only one direction for the BOJ to go - toward money-printing overdrive. 

On the geopolitical front, high-octane anti-government protests are festering as we speak in Ukraine and Thailand. We'll spare you the details, but suffice to say both protest movements seem to want to dig in their heels until their respective governments resign. So far the market reaction has been largely contained within those specific countries, but Red Bull will continue to monitor any broader implications from these events.