If you’re under the impression that there’s a quiet consensus at the European Central Bank in favour of extraordinary monetary policy, and in particular the use of Outright Monetary Transactions or OMT (where the ECB purchases government bonds), the German central bank chief disabused us all of that impression. It has been well known that these types of actions would be anathema to the Bundesbank. Ironically one of the attractions of the single European currency was for other countries in the Eurozone to benefit from the storied discipline of the German central bank. It has to be one of the great ironies of the last few decades that in reality the Bundesbank has been subsumed, neutered and, if anything, the ECB has become more like the Federal Reserve. I bet that Helmut Kohl didn’t see that coming when he ceded ground to the French in order to push through German reunification! Mr Weidmann, the Bundesbank chief, was speaking at a hearing for a case brought by thousands of Germans who have asked for OMT to be declared illegal. In truth this is a bit like shutting the barn door after the horse has bolted, because the ECB has moved away from OMT towards negative interest rates. His view regarding OMT is that it could ultimately involve taxpayers taking on risk, something that is not permitted in the German constitution. What does this all mean? It just reminds us that ECB monetary policy decisions are hard fought, and it might help us to understand why President Draghi was unable to meet investor’s expectations in December. It is by no means a given that his recently stated intention to stand ready to do more if necessary is not as forceful as he made out. I don’t know, I’m just spit-balling here, I still believe that we’ll see another test of last year’s EUR/USD lows in the near future, but it’s important to read the tea leaves and update one’s thinking. If after all, Draghi is unable to act as forcefully as he would like when the need arises it would be very bullish for EUR/USD, no doubt about it. I would still sway towards bearishness for EUR/USD in the near term, but I retain a bullish outlook for EUR/GBP. Of the two I am probably a little bit less confident about the EUR/GBP view, if only because the bond market is anticipating moves to more negative rates. If that is the case then the next ECB monetary policy meeting is on March 5th, which could be when it happens.
It looks like the Russians and Saudis have agreed an accord to try to manage oil supply. I’m sceptical about how effective this will be in light of the disparate constituents of OPEC, but it at least highlights the straits that oil producers in general are facing now. Oil has been on a tear in recent days, but I suspect that we are close to the limit of any rally at this point. Whether these oil producing giants can prevent further new lows is something we’ll have to monitor, but personally I wouldn’t be betting on it. As I’ve said repeatedly lower oil prices will be of great benefit to consumers everywhere, I continue to look for the effects of recent falls in the oil price to feed through into consumption patterns later on this year. Record credit expansion in China in January if further evidence of coming positives for the global economy. The Chinese are more afraid of a hard landing than deal with massive over-leveraging. This should be a boost for the global economy in the short term at least. Where the future is concerned I’ll keep my eyes tightly shut.
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