I have been forecasting 2 things with respect to the $USD, 1) I believe it's long term primary trend will continue with a carry trade unwind, but this is a difficult concept without Greece even in the picture.
The conventional thinking is that a rate hike from the F_E_D will increase the value of the $USD, which policy tightening usually does, but it's also a net negative for the economy and for the market, especially if the economy tanks on a rate hike. Even though I don't agree that the target Funds rate should be at ZIRP for over 5 years with no elbow room in case of a recession, as the Bank for International Settlements BIS (the Central Banks' bank) stated in its yearly report, "Even the leading Central Banks don't have the balance sheet to deal with a garden variety recession" (paraphrased), read that as the F_E_D, I also don't think the economy is anywhere near strong enough for a rate hike without negative consequences.
Unless the F_E_D is specifically trying to head off the equity/asset bubble, the normal reason for hiking is to cool the economy that is usually overheating and to keep inflation down, neither of which are even close to a problem right now. So in my view, the F_E_D sees something they are more afraid of than the effects a rate hike (or series of them) will have on the economy when it's far from over-heating. I don't know specifically what it is that they are worried about, I can make a lot of guesses, but I'd say it's the fact they have very little elbow room to maneuver at ZIRP should things turn further south.
So once again, a F_E_D rate hike as hawkish policy "should" normally send the $USD higher which is why in past meetings they have been concerned over the $USD's valuation, but it has come down since then, in my opinion in no small part because of the $USD carry trade unwind.
Here's the $USD vs. ES, you can see the uptrend in the $USD as the carry trade is expanded and proceeds from the positive carry trade were invested in Treasuries and equities...
Take a look at the trend in TLT, 30+ year Treasuries...
Now look at the $USDX and remember one of the first assets to fall on a carry trade unwind is Treasuries...
I believe the carry unwind has lessened the F_E_D's fear of a rate hike as the $USD is no longer at its highs and moving higher, but trending down.
I expect the carry trade unwind to send the $USD to new lower lows, however this lower $USD also makes the F_E_D less concerned with a rate hike and when they hike rates, the knee jerk reaction to policy tightening is a stronger $USD which would, because of the rate hike, have negative consequences on the market which should accelerate the downside carry trade unwind, sending the $USD lower. It's an interesting little tangle of what should happen, how it actually happens is a bit of a mystery, but if you saw the F_O_M_C last week when they left rates unchanged, the $USD plunged on the news, the opposite should happen when they do hike, setting off the chain of events described above.
However my closer term analysis and more immediate reason for this post has been my belief in a $USD move higher and Euro move lower which is based on the charts of the $USDX and Euro futures. This seems to be specifically related to the Greek situation. A lot of traders are complacent to the situation thinking a Greek default (if they aren't rescued before the end of the month) , isn't that big of a deal and I think that's very dangerous thinking and could have very dangerous effects for the EUR/USD.
The latest I've heard from today's Finance Ministers' Emergency Greek meeting was that Germany and Ireland's Finance Ministers wanted the ECB to curb the ELA funding assistance which has been upped 3 times since Wednesday due to the outflow of capital from Greek banks, at this point the ECB (in 3 increases to Emergency lending assistance to capitalize Greek banks with Friday and today's increases unscheduled) is the only thing preventing Capital Controls in Greece and even bigger problems, so I'm not so sure about the earlier BBC story that "Greece is saved" if the Fin mins are seeking to curb ELA assistance, they apparently aren't too happy with Greece's latest proposal brought today / over the weekend....Apparently there were two and they were very different, so much so that Ireland's Finance Minister was angry they had been called to an Emergency summit when Greece didn't even have the right proposals and called their behavior, "Unprofessional".
From the FT:
"Eurozone finance ministers held an intense debate at their closed-door meeting over whether Athens should impose capital controls to stem the massive deposit withdrawals from Greek banks, three officials said.
Mr Schäuble and Mr Noonan argued forcefully for limits on the amount of ELA approved by the central bank unless capital controls were introduced. But there was no decision on whether such controls were needed and ECB officials hit back, saying ministers should not be weighing in on monetary policy."
That sounds a bit different from "Greece is saved" earlier today.
Now the Goldman paper in which the ECB WANTS a Greek default which on the face of it makes little sense to me considering the ECB not only increased the ELA assistance last Wednesday, but after massive outflows from Greek banks, raised the ELA funds in two unscheduled meetings Friday and again today, but as per Goldman who believes the ECB wants Greece to fail...
"As tensions around Greece have mounted, it is something of a puzzle that EUR/$ has shown little reaction. Our explanation, laid out in our last FX Views, is that much of this price action stems from the Bundesbank, which has reduced the maturity of its QE buying, enabling the Bund sell-off and moving longer-dated rate differentials in favor of the Euro. EUR/$ thus hasn’t traded Greece, but instead growing question marks over ECB QE....
From an economic perspective, Greece shows that “internal devaluation” – whereby structural reforms are meant to restore competitiveness and growth –is difficult politically and a poor substitute for outright devaluation. Emerging markets that devalue during crises quickly return to growth, powered by exports, while Greek GDP continues to languish. We emphasize this because – even if a compromise involving a debt haircut is found – this will not do much to return Greece to growth. Only a managed devaluation, with the help of the creditors, can do that. With respect to EUR/$, we think the Bund sell-off increases EUR/$ downside if tensions over Greece escalate further. This is because the ECB, including via the Bundesbank, would almost surely step up QE to prevent contagion. We estimate that the immediate aftermath of a default could see EUR/$ fall three big figures. The ensuing acceleration in QE would then take EUR/$ down another seven big figures in subsequent weeks. We thus see Greece as a catalyst for EUR/$ to go near parity, via stepped up QE that moves rate differentials against the single currency
A different way of saying what Goldman just hinted at: "Greece must be destroyed, so it (and the Eurozone) can be saved (with even more QE)."
Whether Goldman's conspiracy theory or perhaps conspiracy fact as Draghi is Goldman Alumni as were the Greek PM's who put Greece in to this terrible Austerity downward spiral, happens or not, the one thing I see and the only thing I care about is what I can observe and going through all of the futures in multiple timeframes today, the two that stood out on longer/stronger charts were the $USD and the Euro. Remember for the EUR/USD to fall, the Euro must fall and the $USD rise, there is some relativity here, but generally you can assume when the Euro falls the $USD rises. In come our charts.
Note the confirming divergences all pointing to a larger EUR/USD move lower...
And the daily EUR/USD...
There are so many different dynamics here, but from what I see it looks like a move lower in the EUR/USD toward parity is in the cards, my guess is that does not bode well for Greece.
Beyond that, there are numerous other factors that are chain reactions from the F_E_D to the price of oil, Treasuries to equities and $USD carry trade unwinds, I can't speculate beyond that. I just believe that's a strong set of charts pointing to a lower EUR/USD.
No comments:
Post a Comment