Morning Brief – How Low Can Ya Go?!

How Low Can Ya Go?!

Despite its relative adolescence on the global stage the Euro is a big player. Largely due to its incompleteness it hasn’t achieved the status of a reserve currency and doesn’t play a huge role as an underwriter of trade in goods and services outside of its own member states and continent. Whilst spewing out headlines on a daily basis given the number of hard and soft data releases what with 19 sovereign members, the Euro never seems to move very much. This isn’t just due to the thirteen trillion Euros in its monetary system making it big and lethargic to move it’s also down to the immense liquidity that has been provided by the European Central Bank and global monetary institutions that has subsumed and killed John Maynard Keynes’ animal spirits.

Today, with the Euro having sold off to its weakest level against the US Dollar so far this year, there are serious Euro discussions afoot. The pair has lost 1.2% versus the US Dollar so far this month meaning that US Dollars are now 1.3 cents more expensive than they were 13 trading sessions ago. With one-month implied volatility hovering around the 4% mark and 9 trading sessions to go in the month, the move is considerable.

This Thursday Christine Lagarde will present the ECB’s latest monetary policy decision. Far from a standard meeting, the European Monetary Authority is expected to launch a strategic review and rethink of its inflation goal. At the moment the ‘close but just below 2%’ ECB mandate looks like a distant memory. If this takes hold as a ceiling rather than a target in the expectations of the consumer and business then disinflation creeps further onto the cards. The move is dramatic and a poorly handled situation could bring further downside to the Euro.

To add to the gloomy international picture, yesterday the International Monetary Fund released its World Economic Outlook Update. If you look at the update that markets received in October last year and in April/July before that references to the trade war between the US and China were littered across each page. Alongside admonitions from the IMF about the threat that the trade war presents to the global economy were heavy handed cuts to global growth outlooks. The two were causal – the threat to Sino-US trade undermined global growth forecasts so severely it was a global systemic risk to growth.

I bemoaned last week of the insignificance of the phase 1 trade deal but make no mistake, no matter how loose-weave its enforcement and ambition it does still provide some assurances to bilateral trade. How then can a partial resolution of the rhetorical conflict be deserving of yet another 0.1 percentage point downward revision of 2019 and 2020’s growth expectations?! The IMF seems to be writing allegory to us – reading between the lines is definitely necessary. Their true message seems to be that a global recession is on the cards unless monetary authorities continue to do whatever it takes to stave one off. Get ready then for a weaker Euro and that count of the broad money base to push even higher from thirteen trillion.

Discussion and Analysis by Charles Porter

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