Use your imagination

As Willy Wonka advised, Come with me and you’ll be in a world of pure imagination…Not just a sign of the whimsical nostalgic viewing of Blondemoney’s Christmas, this is in fact an exhortation to break free from your shackles and think creatively. Otherwise you’ll wake up to EUR/USD trading at 1.2045 and think it’s impossible to sell the Euro here. Isn’t it?

Well, let’s look at the evidence…

1. QE is coming, soon, and it’s just a question of thrashing out the details, and whether Draghi can persuade Weidmann to accept that a long period of negative CPI prints is actually “deflation”. Note Draghi’s latest interview:

“The risk that we do not fulfill our mandate of price stability is higher than six months ago,” ….”We are in technical preparations to adjust the size, speed and compositions of our measures early 2015, should it become necessary to react to a too long period of low inflation. There is unanimity within the Governing Council on this.”

While his lieutenant, Chief Economist Peter Praet said:

Inflation expectations are extremely fragile,” and we cannot simply “look through” them. He goes on to say that the sovereign bond market is the only market big enough: “There is not too much to buy on the corporate bond market and it is concentrated in a small number of countries,” … and that they might choose a different method to overcome concerns: “Theoretically, we could also always buy indices where you have no control of the composition“. Once they are talking about the details of how, you know the plan is being thrashed out.

2. Negative interest rates have a very real impact

The latest FX reserve data from COFER showed a big shift by reserve managers out of Euros – as Nomura report this is one of the largest quarterly declines ever:

COFER FX reserves


That was just in Q3. The Euro has been heading lower since then, and we now have the threat of even lower rates further out the yield curve ahead, given the prospect of QE. This shift in behaviour by central banks is HUGE. Their decision to diversify out of dollars was one of the main reasons why the dollar suffered so much in the 2000s (ok and the twin deficits too – which by the way have also now flipped in favour of the dollar). This is why the negative deposit rate is so significant. As long as that remains, the central banks have a genuine and urgent need to find more yield on their cash.

3. Political risk

The snap Greek election holds considerable risk if, as expected, the anti-bailout party SYRIZA win. Now, markets don’t usually rehearse the same panic twice, and we’ve already done “Grexit”. Plus this time there are more safeguards in place. But that doesn’t mean we won’t have a wobble.

Add into that the rise of other anti-immigration/Eurosceptic parties such as Podemos in Spain, and the popularity of the anti-Muslim marches in Germany (29% support them), and the political picture is not risk-free.

Volatility is back. This means that the rangebound environment of the past few years is on its way out.That red oval is not going to hold.

Emerging from low vol This is why you have to dare to dream big. 50% rally for the dollar coming up? Why not – we have had it before:

Dollar Index long term

12% rally in the dollar last year versus the Euro. We do that again and we are at 1.0500.

So, if you want to view Paradise, simply look around and view it… if you want to change the world, there’s nothing to it….

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