Thursday, November 7, 2013

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

Czech Republic Enters Currency Debasement Club; Koruna Intervention Triggers Record Drop; "Hardball" in Pictures

Posted: 07 Nov 2013 05:23 PM PST

Currency madness has spread to the Czech Republic. Central bank intervention triggered a record plunge in the Koruna vs. the Euro.

Bloomberg reports Czechs Play Koruna Hardball as Intervention Triggers Record Drop
The Czech central bank's return to currency interventions after 11 years heralds a push for a weaker koruna to ward off deflation and kick-start the economy.

The koruna plunged 4.4 percent to 26.982 against the euro yesterday, its biggest-ever drop and the most in the world on the day, after the central bank sold the currency in the foreign-exchange market. Governor Miroslav Singer pledged to keep intervening "for as long as needed" to spur inflation, setting a target of "near" 27 per euro, a level the koruna last traded at in 2009.

"The central bank signaled willingness to play hardball in its foreign-exchange policy," Luis Costa, an emerging-market strategist at Citigroup Inc., said by e-mail from London. "For the moment, I believe the 'ideal level of 27' will be met."

Unlike interventions aimed at strengthening the exchange rate, which require sales of foreign currencies that can deplete foreign reserves, the Czech central bank is printing more koruna to drive down its value. The money supply increase may lead to the higher inflation rates that Singer is pursuing.

"The power is unlimited," Guillaume Tresca, a Paris-based strategist at Credit Agricole SA, wrote by e-mail yesterday. "They can theoretically print as much koruna as they want."
Hardball in Pictures - Koruna vs. Euro



It seems the "ideal" level of 27 was reached in a day. Of course it is preposterous to propose that anyone, especially central banks have any notion of what the "ideal" level is.

From a consumer standpoint, the more European goods Czech citizens can buy with the Koruna the better. But central banks will have none of that.

About That Eurozone Entry

Wikipedia comments on the Czech Republic Plans to Join the Eurozone.
The Czech Republic planned to adopt the euro in 2012, but its government suspended that plan in 2007. Although the country is economically well positioned to adopt the euro, there is considerable opposition to the move within the Czech Republic. According to a survey conducted in January 2011, only 22% of the Czech population was in favour of replacing the koruna with euro.
One alleged disadvantage of joining the eurozone is giving up the ability to do what the Czech Republic just did.

Of course the ECB is on its own currency debasement mission vs. the US dollar and Japanese Yen as noted in ECB Unexpectedly Cuts Rate to .25%; Draghi Promises Loose Policy for "Extended Period", "Ready to Consider All Instruments"; What Debasement is Next?

Where Does It End?

For years, I have been asking supporters of these competitive currency debasement schemes "where does it end"?

  • The euro monetarists want a weaker euro vs. the dollar, the yen, and the koruna.
  • The koruna monetarists want a weaker koruna vs. the euro, the dollar and the yen.
  • The dollar monetarists don't much care about the euro, but they do want a lower dollar vs. the euro and the yen.

Recently, Ambrose Evans-Pritchard at the Telegraph proposed the ECB devalue the Euro to support growth and end deflation.

For further details, please consider Lunatic Howls for Competitive QE Debasement; Another Swan Dive Into Cesspool of Economic Silliness; Following Lemmings Over The Cliff; It's Madness!

How the hell can competitive devaluation work, when every country can "theoretically print as much currency as it wants" and every country wants a declining currency vs. every other currency to support growth?

Ambrose, I am still waiting for the answer to that question.

Given that Ambrose (and every other misguided monetarist on the planet) proposes a mathematical impossibility, I may be waiting for a long time.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Euro Swings Significantly, Gold Dips Following ECB Rate Cut Announcement; US Tapering Coming Up?

Posted: 07 Nov 2013 10:41 AM PST

Here is a 10-minute Euro chart that shows wild swings following the Unexpected ECB Decision to lower rates today.

10-minute Euro Chart

 

The Euro swung 2 cents vs. the US dollar but has now regained about half of the move.On a percentage basis, these are substantial swings.

10-minute Gold Chart



Charts from Barchart.

Gold fell about $30 following the ECB announcement and has taken back about a third of the decline.

 US Tapering Coming Up?

Is competitive currency debasement bad for gold? It shouldn't be.

Likely, this is more of an over-reaction to the still-lingering belief that the Fed is going to taper.

How likely is that? Not very according to Bloomberg columnist Caroline Baum in her article today A GDP Report in Search of Liftoff
While real GDP increased 2.8 percent in the third quarter, inventories accounted for almost a third of the growth. Consumer spending added 1 percentage point and net exports 0.3 percentage point. Real final sales, which is GDP less inventories, rose 2 percent, close to the trend since the recession ended in June 2009. Final sales to domestic purchasers, which excludes exports and includes imports, rose a meager 1.7 percent.

So there you have it. Almost five years of zero-percent interest rates, about $3 trillion of asset purchases by the Federal Reserve and lots of forward guidance on both, and the U.S. economy still can't get out of its own way. Whatever else the Fed decides, tapering asset purchases isn't in the cards any time soon.
Should vs. Will are Horses of a Different Color

Given the huge asset bubbles in equities and corporate bonds, the Fed ought to be tapering now. Then again, given that repetitive bubble blowing never makes any sense, the Fed should never have launched three rounds of QE in the first place.

But what the Fed "should" do and what the Fed "will" do are horses of a different color. Baum is highly likely correct in her assertion "tapering asset purchases isn't in the cards any time soon."

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

ECB Unexpectedly Cuts Rate to .25%; Draghi Promises Loose Policy for "Extended Period", "Ready to Consider All Instruments"; What Debasement is Next?

Posted: 07 Nov 2013 09:22 AM PST

The ECB did the unexpected today, cutting the interest rate to .25% from .50%.
Here is the ECB press release.
7 November 2013 - Monetary policy decisions

At today's meeting the Governing Council of the ECB took the following monetary policy decisions:

  1. The interest rate on the main refinancing operations of the Eurosystem will be decreased by 25 basis points to 0.25%, starting from the operation to be settled on 13 November 2013.
  2. The interest rate on the marginal lending facility will be decreased by 25 basis points to 0.75%, with effect from 13 November 2013.
  3. The interest rate on the deposit facility will remain unchanged at 0.00%.
News Conference Text

Bloomberg has the ECB President Draghi News Conference Text.
Here are a few key snips.

  • We decided to lower the interest rate on the main refinancing operations of the Eurosystem by 25 basis points to 0.25 percent and the rate on the marginal lending facility by 25 basis points to 0.75 percent. The rate on the deposit facility will remain unchanged at 0.00 percent.
    •  
  • Our monetary policy stance will remain accommodative for as long as necessary.
    •  
  • The Governing Council expects key ECB interest rates to remain at present or lower levels for an extended period of time. This expectation continues to be based on an overall subdued outlook for inflation extending into the medium term, given the broad-based weakness of the economy and subdued monetary dynamics.
    •  
  • We are ready to consider all available instruments, and, in this context, we decided today to continue conducting the main refinancing operations as fixed rate tender procedures with full allotment for as long as necessary, and at least until the end of the 6th maintenance period of 2015, more precisely on July 7, 2015.
    •  
  • The Eurosystem's special-term refinancing operations with a maturity of one maintenance period will continue to be conducted for as long as needed, and at least until the end of the second quarter of 2015. The fixed rate in these special-term refinancing operations will be the same as the MRO [main refinancing operation] rate prevailing at the time.
    •  
  • We decided to conduct the three-month longer-term refinancing operations, the LTROs, to be allotted until the end of the second quarter of 2015 as fixed-rate tender procedures with full allotment. The rates in these three-month operations will be fixed at the average rate of the MROs over the life of the respective LTRO.
    •  
  • The risks surrounding the economic outlook for the euro area continue to be on the downside. Developments in global money and financial market conditions and related uncertainties may have the potential to negatively affect economic conditions. Other downside risks include higher commodity prices, weaker than expected domestic demand and export growth, and -- and slow or insufficient implementation of structural reforms in euro area countries.

What Debasement is Next?

It could be anything. Here is the key sentence: "We are ready to consider all available instruments, and, in this context, we decided today to continue conducting the main refinancing operations as fixed rate tender procedures with full allotment for as long as necessary, and at least until the end of the 6th maintenance period of 2015, more precisely on July 7, 2015."

The currency cranks calling for more debasement got their wish today. But given the ECB did not do everything at once, and is only "ready to consider all available instruments", I doubt the cranks will be satisfied.

For further discussion, please see Lunatic Howls for Competitive QE Debasement; Another Swan Dive Into Cesspool of Economic Silliness; Following Lemmings Over The Cliff; It's Madness!

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Posted by Blogku at 11:02 PM

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