Friday, June 6, 2014

Frankfurt we have a problem

Frankfurt, We have a problem.

Yesterday Mario Draghi to great anticipation of the markets unveiled a slew of policy actions designed to help lift European economies, fight deflationary pressures, and weaken the Euro. That is exactly the way the markets responded, briefly, two hours actually. Then the Euro firmed up again.

What’s a central banker got to do to trash his currency? Well first his has to outdo the other central bankers and governments. But Draghi also has to outdo Obama and that is a tall order. Obama is using unconventional tools like economic sanctions against half a dozen countries, and more importantly against individual citizens of those countries. For example, what are the odds a rich oligarch from Russia is going to deposit large sums of money in the US in the futures? Wealthy people in around the world hare repeatedly being shown that their assets in the US will be seized if their home country government does something to annoy the US government. Furthermore the Snowden revelations about NSA electronic spying on practically every bit of electronic information source means the US government likely knows where in money in the US is depositied already. Those are pretty strong incentives to hide stolen billions in the Euro rather than the dollar. Financial Orbit shared the following Gave-Kal chart today. One would normally expect the blue exchange rate to tail off and follow the interest rate differential.  Many factors are at work here, of course, but rising wariness about a surveillance based government with little regard for legal protections makes a poor refuge. The Dollar brand is and has been badly damaged by the authoritarian leanings of the current US administration.

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