Homepage
PR Newswire
18-12-2013, 11:56 PM
For those who have European investment or business that associated with the Europe region to a large extent. Something investors to take into consideration.
My colleague Vincent Cignarella, a former trader with three decades of foreign-exchange experience under his belt, likes to say the euro is like those big fat bumble bees that lazily float around your garden: it shouldn’t be able to fly, but it does.
The absurdity of the euro’s valuation has been as apparent as ever this week as it briefly broke above $1.38 and just barely missed out on setting a new two-year high versus the dollar, all while data are showing persistent improvement in the U.S. economy and stagnation in the euro zone’s. Like a tired, broken record, the euro exchange rate again highlights the impotence of a monetary structure that saddles the euro zone with short-sighted deflationary policies when central banks everywhere else have been pulling out all stops to reflate their economies.
The economic implications are significant. Exports are an important way out for the struggling economies of the euro zone’s periphery, and with the U.S. now showing decent signs of demand growth there should be a chance to boost overseas sales. But a persistently high euro inherently hinders their ability to do so.
The competitive disadvantage is even worse when compared with Japan’s currency. The euro/yen cross is now trading up at levels it hasn’t seen since the crisis of 2008. Yet Japan’s economy, historically the very epitome of stagnation, has easily outstripped growth in the euro zone this year and most likely will do the same next year.
Still, the biggest disconnect is the comparative outlook between the U.S. and Europe.
The past week’s selection of U.S. economic news – a stronger-than-expected November jobs report, a Congressional budget deal that will remove much of the fiscal drag that has been holding back the economy, and a robust retail sales report that hinted at a strong start to holiday shopping – have combined to create a notably rosier outlook. Just as important, it moves up the likelihood of wind-down in monetary accommodation by the Federal Reserve, quite possibly starting with a reduction in its bond-buying program at next week’s monetary policy meeting.
Contrast that with the euro zone. Earlier Thursday we got news that industrial production for the euro zone plunged 1.1% in October from September, against expectations for a 0.2% gain. It came alongside a report that November inflation in Italy and France was just 0.7% on the year in both cases and -0.3% and unchanged on the month, respectively. Deflation is a serious risk for the euro zone.
Other contrasts: Although the Fed’s and the ECB’s policy rates are now more or less at the same zero-bound anchor, longer-term rates are very much in the dollar’s favor. The yield on the benchmark U.S. Treasury, for one, is now a full percentage point higher than that of the euro zone’s benchmark, the 10-year German bund.
So, why is the euro holding up? Because even with the Fed heading toward a withdrawal of stimulus, it’s still far more politically inclined toward a dovish posture than an ECB that’s held hostage by inflation hawks in Germany and by a political structure that prohibits a one-size-fits-all policy for the currency area. Meanwhile, the Bank of Japan can be expected to keep printing yen with abandon until it achieves a 2% inflation target. As I wrote on Wednesday, these U.S.-Japanese versions of aggressive central-bank activism aren’t necessarily a positive force for functioning of financial markets or the economy over time. But the uncomfortable fact is that when the ECB is the only one not playing this game its citizens end up as the losers.
Something has to give. And it will be at the ECB. As Germans themselves start to face the harsh reality of deflation, resistance toward aggressive easing will diminish on the ECB board – even if a sizable number of Germans might even think negative prices are a good idea.
If the economic deterioration continues, something more aggressive – if not Fed-style bond-buying then perhaps negative rates on European banks’ ECB deposits – must eventually be adopted.
At that point, the European bumble bee will lose its wings.
http://blogs.wsj.com/moneybeat/2013/12/1...od=WSJBlog
My colleague Vincent Cignarella, a former trader with three decades of foreign-exchange experience under his belt, likes to say the euro is like those big fat bumble bees that lazily float around your garden: it shouldn’t be able to fly, but it does.
The absurdity of the euro’s valuation has been as apparent as ever this week as it briefly broke above $1.38 and just barely missed out on setting a new two-year high versus the dollar, all while data are showing persistent improvement in the U.S. economy and stagnation in the euro zone’s. Like a tired, broken record, the euro exchange rate again highlights the impotence of a monetary structure that saddles the euro zone with short-sighted deflationary policies when central banks everywhere else have been pulling out all stops to reflate their economies.
The economic implications are significant. Exports are an important way out for the struggling economies of the euro zone’s periphery, and with the U.S. now showing decent signs of demand growth there should be a chance to boost overseas sales. But a persistently high euro inherently hinders their ability to do so.
The competitive disadvantage is even worse when compared with Japan’s currency. The euro/yen cross is now trading up at levels it hasn’t seen since the crisis of 2008. Yet Japan’s economy, historically the very epitome of stagnation, has easily outstripped growth in the euro zone this year and most likely will do the same next year.
Still, the biggest disconnect is the comparative outlook between the U.S. and Europe.
The past week’s selection of U.S. economic news – a stronger-than-expected November jobs report, a Congressional budget deal that will remove much of the fiscal drag that has been holding back the economy, and a robust retail sales report that hinted at a strong start to holiday shopping – have combined to create a notably rosier outlook. Just as important, it moves up the likelihood of wind-down in monetary accommodation by the Federal Reserve, quite possibly starting with a reduction in its bond-buying program at next week’s monetary policy meeting.
Contrast that with the euro zone. Earlier Thursday we got news that industrial production for the euro zone plunged 1.1% in October from September, against expectations for a 0.2% gain. It came alongside a report that November inflation in Italy and France was just 0.7% on the year in both cases and -0.3% and unchanged on the month, respectively. Deflation is a serious risk for the euro zone.
Other contrasts: Although the Fed’s and the ECB’s policy rates are now more or less at the same zero-bound anchor, longer-term rates are very much in the dollar’s favor. The yield on the benchmark U.S. Treasury, for one, is now a full percentage point higher than that of the euro zone’s benchmark, the 10-year German bund.
So, why is the euro holding up? Because even with the Fed heading toward a withdrawal of stimulus, it’s still far more politically inclined toward a dovish posture than an ECB that’s held hostage by inflation hawks in Germany and by a political structure that prohibits a one-size-fits-all policy for the currency area. Meanwhile, the Bank of Japan can be expected to keep printing yen with abandon until it achieves a 2% inflation target. As I wrote on Wednesday, these U.S.-Japanese versions of aggressive central-bank activism aren’t necessarily a positive force for functioning of financial markets or the economy over time. But the uncomfortable fact is that when the ECB is the only one not playing this game its citizens end up as the losers.
Something has to give. And it will be at the ECB. As Germans themselves start to face the harsh reality of deflation, resistance toward aggressive easing will diminish on the ECB board – even if a sizable number of Germans might even think negative prices are a good idea.
If the economic deterioration continues, something more aggressive – if not Fed-style bond-buying then perhaps negative rates on European banks’ ECB deposits – must eventually be adopted.
At that point, the European bumble bee will lose its wings.
http://blogs.wsj.com/moneybeat/2013/12/1...od=WSJBlog