The Swiss bank just announced that the ceiling they have been maintaining against the euro is to be dropped. That would make sense, since the euro is now trading below 1.17, down from almost 1.40 just earlier. In terms of the exchange rate, that had to be getting very expensive.
But the timing here should be viewed as a sign that the ECB is really about to start QE. This should be the stance because if they don’t, the impact would be minimal, but if they do you can’t be on the wrong side of the trade.
In terms of what this QE will look like…well, that is the question. What is the ECB going to buy? Not public debt, surely. How much more financing can these governments stomach with yields already negative in many countries. Even the worst countries, like Greece, are borrowing at rates that an average citizen would envy.
My guess here is two fold: (1) they buy up private financial assets similar to the mortgage program the Fed had in place, but that it will center on short term bonds, while also working with banks to create a long term financing window (EU companies and banks in particular have notoriously short term financing arrangements) and (2) they take the opportunity to absorb whatever mechanisms exactly they have been using, before now, to hide the massive debt loads that should have been coming due over the past three years.
If you forgot, Europe ended up pulling some master BS, using a combination of trade accounts to gobble up the garbage so that the markets wouldn’t have to see it default. I’m hazy on the exact specifics, but I would gamble that those imbalanced accounts are still outstanding; and my guess is they’re about to get totally monetized.
So the big question now is, where do you park money? I think that it would be very stupid to try and be short right now with central banks making big noise and seemingly readying the cannons.
If this is like past central bank action, then any longs will do – equity, commodities, debt, whatever you like. Oil could get a huge boost since it’s been so ravaged. ECB action will give the Fed room to play, especially if deflation keeps up. Yellen is no Bernanke…yet, but she also hasn’t been tried either. If the Fed coordinates, all boats get lifted.
But the safest low key play is probably just to hug U.S. dollars until things are a little more clear.
I am ~78% cash, with positions in CCJ, BAS and VOC, down roughly 3% in the first two weeks of the year.
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Wouldn’t oil, priced in USD, gain on Euro QE?
Not because of currency moves. Euro QE should further weaken the euro against the dollar. Stronger dollar would be a theoretical headwind against US priced oil.
But then, the biggest reason oil is down so much is demand fears. If Europe starts stimulating, those demand fears may reverse and voila, $100 crude.
We may never see $100 oil again and it may be a long time before $80 is seen.
I expect it’ll be at least 6 months before oil recovers assuming a US recession doesn’t occur in the mean time. The big job cuts like SLB today help but it’s not enough.
Luckily shale oil has horrific decline rates so even keeping all wells w/o new ones will organically cut production there this year.
It would be beneficial if the Euro QE
was able to develop low rates for
30 years similar to the U.S.A. Sure would
provide some long term stability.
I wonder how the Germans are going to take a QE program, if it comes to pass. I personally am still skeptical, but maybe this is all a ploy to force the Germans into a corner. However that has, historically, not gone well for the rest of Europe.
Another random musing: If this was the affect of the end of a relatively small CB internvention into the marketplace, picture the end of these easing programs.
Help me out …
I thought oil was priced in U.S. dollars since we were the biggest user. If our currency weakened the price rose to compensate and now with the dollar rising that is aiding in its’ demise.
Countries paying for oil in Europe got an advantage over us since the euro was a nice premium for years to the dollar … almost by 50% meaning when the converted their euros to dollars they could buy 50% more oil the us for the same U.S. currency.
Has my thinking been flawed?
sorry about that … should have proof read!
… when “they” converted
… more oil than us
“A” game!
Maybe. Sort of depends on prices doesn’t it?
So what if euros trade for more than dollars, if the people trying to trade for dollars for oil have less of them?
Or maybe they have more of them and what you say is true.
Way too complicated a question for a single response. Generally, as the currencies move against one another, that’s when the obvious statements can get made.
Depends on prices, salaries, a whole host of factors.
My fear is that, if I’m correct and we are in a prolonged period of a strengthening dollar, that price will make our shale energy obsolete for years to come while the majors go back to importing cheap crude from the Saudis and buy up our chapter 11 shale companies till it is again profitable to open the spigots.
As the dollar strengthens, uninterrupted, that outlook is a legitimate fear. I am afraid as well.
Mr. Cain Thaler I have a few questions re your investment report, can you contact me through pm to discuss? Thanks chrismark000@gmail.
I’ve sent you an email.