EUR/USD closed around 1.1154 in the U.S. session Wednesday, slumped by almost -0.65% on soft Eurozone/German economic data, dovish ECB talks, lingering Brexit jitters, Trump trade war uncertainty and broad strength in the U.S. dollar. EUR is now basically export-heavy currency, especially to China and also Brexit sensitive as the Eurozone, especially Germany has a significant trading/export relationship with both China and the UK apart from the US. EUR is also under stress on renewed political uncertainty in Spain, although Italy is now relatively “stable”.
EURUSD is also under pressure on broad strength in the US dollar after China denied pause of RR cuts, EM currency stress for higher oil, dovish hold by BOC and the never-ending Brexit saga. Overall, EURUSD lost almost -1.30% in the last 2-weeks and -0.58% for April (till date) after a slump of around -2.22% in Q1-2019.
On Wednesday, EURUSD made the session low of 1.1141 (also at 22-months low) on further Brexit woes as the UK PM Theresa May’s days are numbered even before any Brexit deal. The powerful 1922 committee of the May’s Conservative party has virtually asked PM Theresa May to resign at the earliest if she can’t make any Brexit deal. As there is virtually no progress in Brexit deal between the Conservative Party (May) and opposition Labor Party (Corbyn) despite a long Easter holiday to break the deadlock. Britain is now again preparing for a no-deal hard Brexit on 22nd May rather than participating in the EU election.
On Wednesday, Conservative Lawmakers in a meeting of the powerful 1922 committee decided no changes made to rules on conservative party leadership election and called for clear schedule from PM May on her departure if Brexit deal not approved.
Over the last few quarters, lingering U.S.-China trade war and subsequent Chinese slowdown is negative for European exports and EUR. Similarly, Trump trade war narrative with the EU on automobiles is also negative for the Eurozone economy, especially Germany, the biggest economy and manufacturing/exporting powerhouse of Europe. Thus, economic data out of Germany continues to be soft coupled with some domestic headwinds like auto emission regulation.
On Wednesday, the German IFO Business Climate Index dropped to 99.2 from prior 99.6, lower than the expectations of 99.9, led by the manufacturing sector, while services and construction showed some improvements, but that may also fade in the coming days. The German business expectations dropped to 95.2 from prior 95.6 and lower than the expectations of 96.0. The German current assessment slumped to 103.3 from prior 103.9 (revised upwards from 103.8) and lower than the expectations of 103.6.
Overall, in April, German business morale deteriorated contrary to brief optimism in March. IFO said the data points to 0.8% growth in Germany this year.
IFO statement:
“The mood among German managers became slightly gloomier this month. The IFO Business Climate Index fell from 99.7 points (seasonally adjusted) in March to 99.2 points in April. Companies are less satisfied with their current business situation. March’s gentle optimism regarding the coming months has evaporated. The German economy continues to lose steam”.
“In manufacturing, the business climate has again worsened markedly. Once more, companies rated their current situation less favorably. Pessimism has also grown regarding the coming months. Capacity utilization fell by 0.8 percentage points to 85.4 percent. This is still higher than the long-run average of 83.7 percent”.
“In the services, the index has risen slightly due to more optimistic expectations. However, service providers rated their current situation somewhat less favorably, although still at a high level. In trade, the business climate has weakened somewhat. Companies still saw their current situation as very positive but made downward corrections both to this assessment and to their business expectations. This development was driven by retail trade. Among wholesalers, the index, in fact, rose slightly. In construction, the business climate index rose once again. Companies were considerably more satisfied with what was already a very good business situation. However, doubts are growing that the construction boom will continue”.
On Tuesday, another data shows that the Eurozone consumer confidence slumped further to -7.9 in April from prior -7.2, lower than the expectations of -7.0. As per ECB, the impact of (Trump) trade tensions escalation could heighten financial stress and lower (consumer) confidence.
In a discussion- The economic implications of rising protectionism: a euro area and global perspective, ECB said:
“The risk of a trade war came sharply into focus in 2018, as protectionist threats by the US Administration and its trading partners were followed by concrete actions. Tensions rose over the summer and, while these have been defused on some fronts, the risk of further escalation remains material. The impact of the measures implemented so far on the global and euro area economic outlooks is expected to remain contained. However, large negative effects could materialize if trade tensions were to escalate further”.
“Uncertainty related to protectionism is weighing on economic sentiment and it may rise further, potentially eroding confidence and affecting the euro area and the global economy more significantly. The complexity of intertwined international production chains could also magnify the impact”.
Tariffs announced by the US Administration in 2018:
“Protectionist threats made by the US Administration in 2017 have been followed by concrete actions over the past year. The implementation of tariffs on solar panels and washing machines in January 2018 came first, followed by tariffs of 25% on imports of steel and 10% on imports of aluminum for a wide range of countries in March 2018. After an initial exemption, in June 2018 the tariffs on steel and aluminum were also applied to Canada, Mexico, and the European Union, which resulted in a raft of retaliatory measures”.
“The European Union imposed a 25% duty on a range of US products worth USD 3.2 billion, which came into force in the same month. The US Administration, in turn, initiated a new investigation of automobile and auto parts imports to determine their effects on national security, hinting at the possibility of a 20%-25% tariff increase”.
Tensions with China escalated in the second half of 2018:
“Following an investigation by the US authorities into Chinese intellectual property practices, which concluded that China has a policy of forced technology transfer, the US Administration initiated trade action against China. The measures, implemented in July 2018, included 25% ad valorem duties on 1,300 product types imported from China, with an annual import value equivalent to USD 50 billion. In September 2018 the US Administration announced a further wave of tariffs, targeting USD 200 billion of Chinese exports. China responded by imposing tariffs on exports from the United States worth USD 60 billion”.
“At the same time, there has been some de-escalation of trade tensions on other fronts. Concerns over tensions between the United States and the European Union eased after the summit held in July 2018. In addition, Canada, Mexico, and the United States reached an agreement to replace the North American Free Trade Agreement with the United States-Mexico-Canada Agreement (USMCA), which effectively maintains tariff-free trade for most goods. A truce agreed between China and the United States on 1 December 2018, whereby tariffs on USD 200 billion of Chinese imports would remain at 10% rather than be increased to 25% as previously announced, defused the US-China trade tensions temporarily. Nevertheless, there is still a strong risk of renewed escalation”.
US tariffs against China target, in particular, the electronics and machinery sectors:
“The tariffs imposed directly on China affect a broad range of industries, with a total nominal value of USD 217 billion, or 2% of Chinese nominal value added. The industries most affected are those that produce electronic components, electrical equipment, and machinery, which all feature in the Chinese government’s “Made in China 2025” industrial plan. With regard to the euro area, tariffs imposed by the United States affect around USD 5.5 billion of euro area value added, mainly in the basic metal and, to a lesser extent, the fabricated metal sectors”.
“Retaliatory responses by the United States’ trading partners, particularly China, have targeted US imports across a wide variety of industries and sectors. The food, chemicals, and car industries have been the sectors most affected by China’s retaliation, with tariffs affecting around 7.5% of those sectors’ combined value added. EU retaliatory measures have been much smaller and are targeting non-metallic minerals, electrical equipment, textiles, furniture, food products, other transport equipment (including light vehicles such as motorbikes) and chemicals, covering a total of 0.04% of US industrial value added”.
The latest round of US tariffs imposed on China target a significant part of the two countries’ bilateral trade, while the share of the euro area and global trade directly affected is still limited.
“The products targeted by the tariffs announced in the first half of 2018 by the US Administration and its trading partners affect relatively small shares of US (2%), the euro area (0.2%), Chinese (2%) and world trade (0.4%). Their impact on the world economy is therefore likely to remain contained. By contrast, the latest round of US tariffs, coupled with China’s retaliation measures in September 2018, target almost half of China’s bilateral trade with the United States. As a result, around 12% of total U.S. and 8% of total Chinese goods trade is affected”.
“To some extent, these tariffs may weigh on activity in the United States and China, and the organization of production in supply chains could further amplify the adverse effects. The share of the euro area and world trade affected remains small (2%)”.
The ECB is correct to point out that the present U.S.-China trade jitters are not a full-blown trade war, but a skirmish only. But even with that and relatively small affected Euro/global trade; there is a sudden synchronized global contraction in lieu of earlier expansion. And if this Trump trade war takes a serious shape into a real trade war, then we could see a doomsday-like a scenario for the global economy.
In brief, the EU is now too much dependent on U.S. and Chinese consumption due to their slowing domestic economy/consumption. This is great leverage for Trump in his trade war agenda to make “America great again”. EUR was also under stress on China stimulus disappointment.
There was a report on Tuesday that China’s PBOC may hold RR cuts in the days ahead. The PBOC cited better-than-expected Q1 data behind the less dovish move. The PBOC is likely to pause to assess economic conditions before making further moves. The overall easing bias remains unchanged but PBOC sees less room this year for cutting RRR. The PBOC thinks that fiscal stimulus will play a bigger role in spurring growth rather than monetary stimulus.
But later the PBOC denied any such move to hold back targeted RR cuts, especially for the regional rural banks. The Chinese Premier Li said authorities should not underestimate the difficulties in the Chinese economy, which further add to the ongoing concern about global growth and a Chinese slowdown.
On last Wednesday (17th April), Germany’s Economy Ministry drastically slashed the 2019 GDP growth forecast to a mere +0.5%, just halved of January’s projection of 1.0% that would be the slowest growth in six years. The German government projection of +0.5% GDP growth in 2019 is even less than the latest IMF/IFO projection of +0.8% and much less than the actual 2018 GDP growth of +1.5% (y/y). In Q4-2018, the German economy actually contracted by -0.2% on a sequential basis (q/q) and is on the threat of a technical recession.
The German Economy Minister Altmaier basically blamed some external factors such as Trump trade war (both on China and the EU), lingering Brexit uncertainty (negative for German exports to the UK) coupled with some domestic factors like introduction of the new car emission regulations and even an unusually low Rhine water levels for the unprecedented economic slowdown. The German economy ministry also noted that the global economy should regain some momentum ahead and also pointed out lower/ neutral net trade (less export and more import) behind the soft GDP number.
On last Thursday (18th April) flash data shows that the German manufacturing PMI edged up to 44.5 in April from prior 44.1 (at 69-month low), but lower than the expectations of 45.0 and stays deep into the contraction territory (below boom/bust level of 50.0). The German service PMI edged up to 55.6 from prior 55.4, higher than the expectations of 55.1. The German composite PMI surged to 52.1 in April from 51.4, higher than the expectations of 51.7.
Although the German service industry is improving due to Brexit related relocations from the UK, it’s a small part of the German economy and the market is concerned about its manufacturing woes due to Trump trade war and Brexit. But relatively strong service sector, tight labor market, and wage growth, the German consumer spending should be upbeat in Q2.
Markit said:
“The overall picture for Germany’s private sector has changed very little according to April’s flash data, with strong growth across the services economy continuing to counteract the export-led weakness in manufacturing. Though the PMI has ticked up from March’s 69-month low, it’s merely signaling the same modest rate of underlying growth as seen on average over the opening quarter of the year”.
“Slight upticks in the manufacturing indices for output, new orders and employment saw the headline Manufacturing PMI posts its first rise in nine months, albeit with the latest reading nonetheless the second-lowest since mid-2012. Amid reports of declining car industry, strong competition across Europe and generally subdued global demand, the data showed another steep drop in German goods exports and the lowest confidence among manufacturers for six-and-a-half years”.
“The survey continues to highlight strong job creation across the service sector, which is in turn supporting wage growth and means we should see consumer demand continue to rise during the second quarter”.
For the overall Eurozone, manufacturing PMI edged up to 47.8 in April from prior 47.5, but was lower than the expectations of 47.9 and well below the contraction zone. The Eurozone service PMI for April slumped to 52.5 from 53.3. lower than the expectations of 53.2. The Eurozone composite PMI inched down to 51.3 in April from prior 51.6, lower than the expectations of 51.8 and was at a 3-month low.
Markit said:
“The Eurozone economy started the second quarter on a disappointing footing, with the flash PMI falling to one of the lowest levels seen since 2014. The data add to worries that the economy has failed to rebound with any conviction from one-off factors that dampened activity late last year, and continues to show only very modest growth in the face of headwinds from slower global demand growth and subdued economic sentiment. The surveys indicate that quarterly Eurozone GDP growth has slowed to just under 0.2%. A similar 0.2% rate of expansion is being signaled for Germany but France stagnated and the rest of the region has moved closer to stalling”.
“Manufacturing remained the key area of concern, with output continuing to contract at one of the fastest rates seen over the past six years. Forward-looking indicators showed some signs of improvement but remain deeply in negative territory to suggest the factory malaise has further to run. The slowdown also showed further signs of engulfing the service sector, where growth cooled again to one of the weakest rates seen since 2016. Some encouragement can be gleaned from an improvement in employment growth, although even here the pace of hiring is among the lowest seen for two-and-a-half years. The persistence of the business survey weakness raises questions over the economy’s ability to grow by more than 1% in 2019”.
Further on PMI data, in France, another large Eurozone economy, the manufacturing PMI dropped to 49.6 in April (32-months low), down from 49.7, below expectation of 50.0. The French service PMI, on the other hand, improved to 50.5, up from 49.1, above expectations of 49.8. The composite PMI rose to 50.0, from 48.9.
Markit said:
“The stabilization of output in April is further evidence of the dwindling economic impact of the ‘gilets Jaunes’ demonstrations. Protestor numbers have fallen to approximately 10% of their peak and the remaining disruption has been limited. However, protests aside, an underlying slowdown in demand remains evident in the French PMI data. New orders fell for the fifth month in a row during April, partly driven by a sixth consecutive contraction in exports. Although the rate of deterioration in new business eased, many panelists mentioned a decline in activity at their clients”.
“More positively, firms were able to brush aside recruitment difficulties and increase staff numbers at a faster pace than in March. Although a mismatch between skills and open vacancies remains apparent, businesses continue to demonstrate the ability to overcome the adverse conditions”.
On 17th April, last Wednesday, data shows that the Eurozone core CPI was unchanged in March at +0.8%, right on the expectations of no change at +0.8% and far away from the ECB target of “just below” 2% (y/y). The headline Eurozone CPI was also unchanged in March at +1.4%, right on the expectations of no change at +1.4%.
On 14th April, ECB President Draghi warned: “The risk of hard Brexit and global trade war continued to loom large. But I am still optimistic that factors weighing down Eurozone growth are waning. And there will be a recovery in the second half”.
On Tuesday (23rd April), ECB’s Coeure said: “The economic slowdown in Germany is stronger than expected and missing transmission from wage costs (growths) to consumer prices (inflation) is a bit puzzling as businesses are apparently accepting narrower profit margins. But that cannot go on forever, at some point they will raise prices. The ECB does not expect a recession, but it is true that economic slowdown in Germany is stronger than expected. The market pricing in a rate hike by the ECB only in late 2020 is reflective of a different assessment shared by the governing council. And the ECB's economic projections will be revised in June”.
The ECB officially has said it won’t raise rates at least until the end of the year (2019) but the market is pricing no rate hike until 2021. On Tuesday, Coeure basically tried to downplay those rate hike expectations by the market. Coeure said: “We are not tied to such market expectations; they are an important input, but we are not led by them. They reflected an assessment of the downside risks which is different from that of the Governing Council”.
The ECB EC member Coeure, a known ECB hawk basically poured cold water on the ECB plan of tiered deposit rates and sounds like a true hawk, a rare phenomenon in ECB talks these days to keep EUR lower and try to stimulate the economy (exports).
As a reminder, there is speculation that the ECB might need to soften the impact of its negative interest rates on banks by introducing a two-tiered deposit rate system (for banks) to negate the adverse effect on excess bank deposits in ECB so that ECB could go more negative. But consistent negative/zero rates (NRIP/ZRIP) are also bad for the EU banks & financials as their bottom line may get hit due to lower NIM (net interest margin).
On Tuesday, Coeure said, blasting the banks as they urge the ECB to ease up on the negative deposit rates: “The negative interest rates are not the biggest problem, but banks should rather focus on costs instead. I don’t see any monetary policy reason for tiered deposit rates. But that needs to be watched closely. The Eurozone economic growth will return in H2-2019 if trade conflict is resolved”. Coeure said: “At the current juncture, I do not see the monetary policy argument for tiering. However, we must keep a close eye on developments”.
Coeure was asked about ECB’s negative deposit rates. Each year Europe’s banks are paying around EUR 7.5B in “penalty interest”. Draghi has earlier indicated that a tiering of the negative interest rate could be considered in order to relieve the burden on them.
Coeure said: “I find the intensity of the discussion surprising because it focuses on a narrow aspect of our monetary policy. The debate about interest rates being low for long should be broader. We understand the concerns of those affected by the harmful side effects of very low interest rates. These are increasing with time. There are possible concerns about financial stability; asset prices are rising. Bank profitability is also a concern. However, negative deposit rates are really not the biggest problem. Their contribution to low bank profits is limited. Banks should think more about their costs”.
Coeure was specifically asked whether that means he is not in favor of a softer, tiered negative interest rate; Coeure said:
“No, it doesn’t. It is a useful, relevant discussion that we have had before and should revisit regularly. Japan and Switzerland have tiered systems. But the negative deposit rate is not the most important reason why interest rates are so low. If we change something, there has to be a monetary policy reason for doing so. At the current juncture, I do not see the monetary policy argument for tiering. However, we must keep a close eye on developments. Those, who would profit from tiering are, above all, banks with high excess liquidity, of which many are located in France and Germany where bank lending is already running high. Thus there is no evidence so far that the negative deposit rate is bad for lending--on the contrary”.
Coeure also indicated that the TLTRO-3 should not be as generous as the previous edition, adding that the terms of the ECB’s new TLTRO-3 likely to be unveiled in June and would reflect the improved lending conditions compared to when the previous round of TLTRO-2, which was introduced in 2016.
In line with Draghi’s optimism, Coeure also stuck to ECB expectations for a rebound in growth in H2-2019, albeit with a degree of uncertainty. Coeure said: “We expect growth to return in the second half of the year, provided trade conflict is resolved. There are no grounds for overly gloomy thoughts. On the other hand, it is very uncertain how long and how strong the downturn will be”.
On the question of the recent spate of soft Eurozone economic data, Coeure said it’s temporary and mainly a function of Trump trade war and Brexit:
“I have mixed feelings. On one hand, the slowdown in growth is probably only temporary. We expect growth to return in the second half of the year. There are no grounds for overly gloomy thoughts. On the other hand, it is very uncertain how long and how strong the downturn will be. The reasons for the uncertainty are political: the trade tensions stemming from the United States, and also Brexit to some extent. Growth will only return in the second half of the year if there are signs of a resolution to the trade dispute”.
On the question of recession like condition in export savvy Germany, Coeure said German slowdown is more than expected on auto emission regulatory woes and China slowdown (as a result of Trump trade war):
“No, we do not expect a recession. But it is true that the economic slowdown in Germany is stronger than we had expected. There were temporary factors, such as the problems with emission tests in the car industry. Now things depend mainly on growth in emerging economies, above all China. The German export-oriented growth model also entails risks. It was very advantageous during the upturn of the global economy, now things are not so good”.
On the question of more fiscal stimulus for Germany to increase its domestic demand, Coeure said:
“The ECB does not lecture the German Government. In its ‘European Semester’ reports, the European Commission made it clear that Germany should balance its growth and increase domestic demand. That could be done, above all, through more investment, which would be good for the Germany economy”.
“In Europe, there is much discussion about the level of budget deficits. Of course, the amount of the deficit is important for keeping debt under control, but it would be at least as important to talk more about the composition of expenditure. Most countries, including my home country France and also Italy, have no fiscal room for maneuver for more spending. However, through reallocation, the expenditure could become more growth-friendly”.
On the question of TLTRO-3 and its terms, Coeure said:
“The TLTRO loans are not a subsidy for the banks; they are a monetary policy instrument aimed at ensuring adequate lending. The Governing Council will presumably decide on the conditions, including the interest rate, in June. The remarkable progress in lending to the real economy will have to be taken into account. The situation today is very different to 2016 when we issued the last TLTROs to actively support lending. However, we want to protect this achievement. And the Governing Council will decide on that (TLTRO-3 conditions) based on economic data”.
On the puzzle/mystery of flat Eurozone inflation despite upward wage growth, Coeure basically blamed business not to hike their product or service price on account of low demand and competition despite the rise in input costs. Coeure indirectly admitted that the Eurozone consumer spending/demand is not strong enough despite significant wage growth.
“It is half a puzzle. At least wages are now rising, following the fall in unemployment, as we had expected. But what is missing is the transmission from wage costs to product and consumer prices. That is a bit puzzling. Businesses are apparently accepting narrower profit margins rather than raising prices. That may be because they do not think demand is strong enough yet and because of strong global competition. But that cannot go on forever. At some point, they will raise prices. However, the most recent slowdown in the economy is a setback”.
On ECB plan of “normalization” of monetary policy, Coeure said the Eurozone is far behind the US economic (interest rate) cycle and currently, there is no idea of a “neutral/terminal” rate for the ECB as with the Fed. Coeure basically admitted that jawboning (forward guidance language) is now the primary instrument for the ECB rather than any real action:
“An interesting question--a lot of thought is given to that at the International Monetary Fund (IMF). The Federal Open Market Committee of the US central bank, the Federal Reserve System, asks its members explicitly for their estimate of the longer-term development of interest rates. We don’t do that. We in Europe are also lagging far behind the US economic cycle. I don’t know what the long-term aim for interest rates in Europe should be”.
“But for me, “normalization” means that the key interest rates are again the main instrument of monetary policy – as they were before the crisis. We are not there yet. The bond purchase programme – “quantitative easing” – is not yet over, because we are reinvesting the proceeds from the maturing bonds. Each month we reinvest a substantial sum. Second, the “forward guidance” is now our main instrument; steering the market through words, not through interest rate changes. We are not abandoning the prospect of normalization, but it has been delayed by the economic downturn”.
On the question of any ECB B/S tapering (QT) in future (like the Fed), Coeure said it’s far away at this moment:
“Yes, like the Federal Reserve System. The Federal Reserve kept its bond holdings for a considerable time after the end of the net purchases and then started winding down its holdings. But in Europe, we have not got that far yet”.
On the question of ECB ammunition in the next cycle of economic crisis, considering that the ECB has almost exhausted all the weapons as the key interest is at zero, bond purchases have hit the limit. Coeure basically said the ECB has no answer but should have enough toolkits in its disposal as per evolving situation (crisis) and also urged for fiscal stimulus from the EU27 member states:
“The best answer is that we have managed in the past. Every time there has been a major challenge, we have found a solution. I am confident that, in the event of a shock, we will find a solution in our toolkit that is within our mandate. Monetary financing is prohibited. But I would caution against the view that only the ECB should have to react to a crisis”.
“We do not know what the next crisis will look like. Every crisis is different. There will be another crisis; there will always be more crises. It would be very unwise to think that the next crisis will be managed by the ECB without any measures having to be taken by governments. The burden of tackling crises must not rest on the shoulders of the ECB alone”.
“We do not answer this question because it all depends on the type of crisis that we are facing at the time. We have not had a discussion about this in the Governing Council either. Experience has shown, however, that we have a broad range of instruments”.
On the prospect of anti-EU/EURO and populist parties gaining more seats in the forthcoming EU Parliament election, Coeure warned about possible EU political jitters and policy paralysis:
“There will probably be a more fragmented Parliament. The legislative decision-making process will be more difficult. Politics as a whole will be more difficult and more complex. We hope nonetheless that the European Economic and Monetary Union will be completed. A push towards a capital markets union is needed”.
On another interesting question of ECB’s decade-old low interest rate policy and rising Euroscepticism, considering the fact that many citizens are frustrated about the low-interest rates which, for example, make retirement provision more difficult and whether the ECB played a part in the success of populist parties, Coeure basically blamed European politicians for the soft Eurozone economic growth, muted wage structure and appreciated the ECB policy of lower interest rate on borrower’ and mortgage perspective rather than savers:
“When the ECB is given the blame for political outcomes that says more about politics than it does about the ECB. We clearly have a political framework in Europe that has not delivered what the people expect; not the growth, the employment nor the income that people in many countries want. The ECB is an easy scapegoat”.
“Our tower here in Frankfurt is highly visible; many eyes are on us. Yes, we must take into consideration the side effects of our policy, the effects on savers, on house prices, etc. We take that very seriously. But the bottom line is that our low-interest-rate policy has benefited savers more than it has harmed them since savers are also workers and borrowers. And in the housing market, the low-interest rate has also helped encourage more construction. The criticism is often too simplistic”.
Overall, Coeure sounds less dovish or more like a hawk on negative deposit rates tiering and TLTRO-3 but the market was not convinced, considering the credibility and epic flip-flops of ECB talks. The market may be now pricing no more rate hike by the ECB in the foreseeable future (even after 2021), if the Fed does not hike further. Coeure also said that Choice of next ECB president should be based on competence, not nationality.
As a pointer, Germany is trying to put a German in the ECB President’ chair after Draghi retires in Oct’19. Coeure, French by nationality is also a potential candidate in this never-ending EU political war of domination between Germany and France, be it on Brexit or on next ECB President.
Coeure tacit admission that ECB is now far away from “normalization” and “jawboning” (forward guidance language) is now the primary tool for the ECB rather than any real rate action is enough for the market to realize that the ECB is not in a position to “normalize” (hike) in the foreseeable future, considering Trump trade war, subsequent Eurozone slowdown, and Fed’s patience.
Thus EURUSD doomed, which is also a strategy for the ECB policymakers to keep EURUSD in the range of 1.15-1.05 rather than 1.15-1.25 to stimulate the European exports to fight Trump trade/FX war.
On last Wednesday (17th April), ECB’s Nowotny, a known hawk, also sounds hawkish as he said: “The ECB is unlikely to cut June forecast significantly and the Eurozone economy should at least stabilize in H2-2019, provided there is a solution to the trade conflict between the US and China. It's not yet time for ECB to introduce rate tiering and the ECB shouldn't use tiering to keep rates low permanently”.
Nowotny, who will retire the ECB in August this year, said: “One can assume there will be a solution to the trade conflict between the U.S. and China. So there are some signs of hope for the second half of 2019 at the moment. Now, of course, in the economic situation we are in, we have to be very careful about normalization but mustn’t lose sight of it. For the moment, though, the ECB should stick to its wait-and-see approach”.
On the growing debate about more negative deposit rates and tiering, Nowotny argued against such step:
“There are measures aimed at simply providing relief for certain business models, for example, the Swiss version -- that appears to me to be quite sensible, also in the euro area even though the time for that hasn’t yet arrived. If I think of it as the first step toward an exit, then I’m in favor. But if you see it as an instrument to ensure permanence, then I believe this is the wrong way”.
On 17th April, ECB’s Hanson also joined the growing chorus (hopes) of H2 rebound for the Eurozone economy on hopes of the US-China trade truce. Hanson said: “There is no reason to doubt that growth will pick up in H2-2019”.
But on 16th April there was also a report that several ECB policymakers said to doubt projections for a growth rebound in H2-2019. The report indicated that there are several ECB policymakers who think that the ECB’s economic projections are too optimistic as growth weakness in China and trade tensions continue to linger amid ongoing suspense about the US-China trade war/truce. The report also suggested that a ‘significant minority’ has expressed doubt that the long projected growth recovery is coming in H2-2019 while some even questioning the accuracy of the ECB's projection models.
As per another report (the familiar ECB trial balloon), the ECB had not discussed further rate cuts in its latest meeting. The report also suggested that ECB officials are said to lack enthusiasm for sub-zero tiering and on the growing tiering debate, it said to underline plenty tools till left. And ECB officials are said to doubt tiering will happen
On early Thursday, EURUSD is currently trading around 1.1150, almost flat on China stimulus suspense and subdued economic projections for the Eurozone growth in the latest ECB economic bulletin for April.
In brief, ECB said: “The global headwinds continue to weigh on Eurozone growth and thus ample degree of accommodation is still needed. The risks to Eurozone growth outlook remain tilted to the downside and information since March confirms slower growth momentum”.
Technically, whatever may be the narrative, EURUSD has to sustain above 1.12250 for any rebound to 1.12600/1.12900*-1.13250*/1.13500 and further rally to 1.14100/1.14500*-1.15200/1.15700* in the near term (under bullish case scenario).
On the flip side, sustaining below 1.12150-1.11700*, EURUSD may fall to 1.11000*/1.10600-1.10100/1.09800 and 1.09300/1.08900-1.08300*/1.08000 in the near term (under bear case scenario).
Pivot: 1.1225 Support: 1.117 1.11 1.106 Resistance: 1.126 1.129 1.1325 Scenario 1: Strong above 1.12250 and sustaining above 1.12600/1.12900*-1.13250*/1.13500, EURUSD may further surge to 1.14100/1.14500*-1.15200/1.15700* in the near term Scenario 2: Weak below 1.12150-1.11700* and sustaining below 1.11000*/1.10600-1.10100/1.09800, EURUSD may further plunge to 1.09300/1.08900-1.08300*/1.08000 in the near term Comment: Short term range: 1.122150-1.08300