BOE and ECB: What It Means and What is Next

The Bank of England, which has a penchant for surprising the market, chose not to wait for the quarterly inflation report to provide cover, and announce GBP75 bln additional bond purchases over the next four months. We forecast sterling to finish the year near $1.50. However, in the near-term there is scope for additional position adjusting. A move above the $1.5500-50 area could target $1.57 before sellers re-emerge.

The ECB focused on liquidity measures, including a 12- and 13-month long-term refi operations and 40 bln euro covered bond purchases. The ECB did not cut rates as many had expected. Short-term European rates back up smartly, with the euribor futures strip yields rising 9-13 bp. We expect the euro to finish the year near $

Chutes and Ladders: Preview of BOE and ECB Meetings

The outcome of the Bank of England meeting will known first. Based on the dovish cast to the Sept BOE minutes and some recent comments, within the context of generally soft economic data, there is speculation that the BOE can resume its asset purchases program with a GBP50 bln purchase over the coming few months. This seems to be the consensus.

If the ECB does cut rates this week, the euro may respond positively as it may be associated with boosting risk appetite, especially ahead of the US jobs report, where the private sector is expected to have created about 90k jobs, half of which may be accounted for by returning strikers. A failure to cut rates may be euro negative on grounds that the crisis in the periphery is likely to worse, without easier monetary policy. Indeed both the ECB rate hikes this year triggered new widening in peripheral spreads over bunds

The Global Double Dip and the French Bank Run

At some point soon, maybe tomorrow, I will be writing an update to two posts: The Fake Recovery and The recession is over but the depression has just begun. The gist of those two posts is still operative and also very relevant, namely that the problems which created a global panic in 2008 are still with us waiting for economic weakness to reassert themselves. When that weakness comes, bad things will happen. I think that about sums it up. We are about at that point right now

Operation Twist Brings No One to the Dance Floor

USD continues to surge amid safe haven demand; EUR breaks below 1.35, EM currencies drop 1-2.5%. The Fed delivered “Operation Twist” but bleak economic outlook continues to weigh on sentiment. Czech CB remains put, South African CB expected to do the same; Brazil unemployment and inflation

Treason?

If you believed the Republican leaders, you would say this is reckless monetary policy aimed specifically at supporting President Obama, a Democrat. You saw the last post I wrote, with the court scene from “A Few Good Men” tacked on. Boehner, Cantor, McConnell and Kyl would have you believe that Ben Bernanke is the misguided and dangerous Jack Nicholson character and they are the Tom Cruise character, trying to get him to admit to his crimes.

Is Bernanke ‘almost treasonous’ then, as Rick Perry has said he is?

Here’s my take

ALERT: Bernanke orders an Operation Twist QE Code Red

The Fed is not just doing QE via Operation Twist, it is also throwing in some mortgage-backeds to up the ante a little bit

This is starting to feel a lot like 2008

I was on BNN this afternoon talking about the Fed running out of ammo, America banks getting downgraded, European banks needing $300 billion in capital, and Greece defaulting on its debt obligations plus a host of other issues – none of them good.

A Policy "Twist" is Better than None

European market consolidates ahead of FOMC decision; GBP softer after potential for QE increases . Operation Twist is likely to be supportive of the dollar; dovish actions include QE and inflation target. Hungarian central bank likely to offer FX reserves; Brazil CPI surprises to the upside, CBRT dovish

Continued Policy Mistakes in Brazil

BRL is one of the worst EM performers today, and continues a string of underperformance (-10.8% vs. USD) that began with the unexpected 50 bp rate cut August 31. Since then, only HUF has done worse at -11.5%. It’s really a confluence of factors, but markets are clearly punishing Brazil for its continued efforts to weaken the currency, which have distorted markets there. Besides the countless FX measures, of which Friday’s was only the latest in a long line of poorly communicated policy shifts, we are now seeing even more distortions added into the economy with the imposition of import tariffs to help protect domestic manufacturers. Not only is this inefficient from pure trade theory, but it will also likely add to already high price pressures

The Unusual Case of Euroland

In the next series of blog posts, we will look in more detail at fiscal and monetary operations of a nation with a sovereign currency. Before we do that, let us briefly examine the case of the Euro. Let me say that we will not address the unfolding crisis across Euroland in detail. The reason is that events are moving too quickly and we do not know where they will lead. This primer in some sense needs to be “timeless”—anything specific that we discuss will quickly become outdated. The fundamental point to be made here is that the Euro arrangement was flawed from the beginning. Crisis was inevitable—as I have been writing since the mid 1990s. There is no way the system as designed could possibly survive a significant financial crisis. And a crisis began in 2007. Due to flaws in the set-up, it was obvious (at least to those who adopted MMT) that the original arrangement was not sustainable. We could not say for sure how the resolution would turn-out, but a fundamental change would be required

Monetary Policy and the Future of China

There is a road open for China involving controlled inflation that would lead to re-balancing, both domestically and internationally, which has some uncertainties. These must be compared to those of sustaining the export-led growth model, basically an even bigger currency mismatch in the PBoC balance sheet and ever more unproductive capital investments

Asian central bank preview: on hold for now

In the Asian EM space, central banks from Malaysia, the Philippines, Indonesia, and South Korea all meet this Thursday. We don’t see any change from these four central banks and in general we believe EM central banks have moved into dovish wait-and-see mode for now, with the obvious exception of Brazil and Turkey, who have both cut. At some point, more EM central banks are likely to cut if the global outlook worsens, but we think it is prudent, and likely, that most remain on hold for now. Markets are, however, punishing countries that have cut rates with an eye towards a weaker currency, Brazil and Turkey