If the ECB bought debt across the board in the Euro-zone in proportion to ECB membership, it is doubtful that Germany could complain, given all countries would be treated equally. Whats more; given the liquidity in peripheral debt versus core debt, proportionate purchases of EZ debt would have a much greater effect on the peripherals. It could serve to cap yields, and establish a floor on the current situation. Something to think about.
CNY/JPY has yet to take part in today’s risk-rally, though it does look poised to do so. 12.20 showed good support in early June. Japan has made it clear they do not want a stronger JPY, and consistent voices in the Diet are anxious about Japanese exporters moving to China. The RSI’s are turning higher off the lows much as they did in June. Tonight’s USD/CNY should fix lower given EUR/USD strength. Something to watch in coming sessions.
The USD/Index has slipped to its support line on the back of ECB Draghi’s favorable comments. The EUBS2 EU/US Basis swap has tightened and Spanish 10-yr yields are back below 7%. The 10-yr Spain market is illiquid; what is seen today is an amplification of liquidity. While yields can quickly move higher, they can move lower with similar speed.
The market now waits to see whether recent ECB rhetoric can proceed towards action.
Overnight, Mario Draghi once again stressed the ECB’s Mandate limitations. He said;
“To the extent that the size of these sovereign premia hamper the functioning of the monetary policy transmission channel, they come within our mandate… We have to cope with the financial fragmentation, address these issues… Within our mandate, the ECB is ready to do whatever it takes to preserve the euro, and believe me, it will be enough.”
Earlier in the week I noted that the ECB was likely to step up rhetoric given the EUR/USD’s proximity to the 200 Month-Moving-Average. This is a prime example, as were Nowotny’s comments yesterday. The ECB is not asleep at the wheel. Rather it is working within the confines of its mandate. I am certain Spanish yields above 7.5% do not show ‘price stability’ to the ECB. They will likely buy time through rhetoric, and then use a form of leverage on the ESM in September.
Monti once suggested using the ESM to guarantee first loss to the ECB on any secondary market purchases. This would add considerably to ESM firepower. Also note that the ECB continues to hold Greek paper at par, despite its cost being much lower. It would be interesting to see the ECB re-mark this paper at cost; giving debt relief to the Greek people. There would be no material loss to the ECB, yet would denote remarkable goodwill to Greece. Sometimes the carrot is needed along with the stick.
This 200-Month-Moving-Average has held since 2004, after being tested in 2005 and 2010. The US FED seems to be trying to protect the downside through threats of QE3; while the ECB ponders allowing the ESM to have a banking license.
In 2010, when this moving average was last tested; the USD came under severe pressure from FED QE decided at Jackson Hole, coupled with a change in Chinese rhetoric regarding the Yuan, where they decided to allow it to become more ‘flexible.’ This allowed China to be more aggressive in their reallocation of FX reserves from the USD into the EUR. The latest statements from China and the IMF lead me to believe they are happy with the current USD/CNY rate, and see it at equilibrium. That being the case, all eyes on the US FED and the ECB.
Any significant move through this support line will likely generate a reaction from various Central Banks.
I posted 2 news articles earlier because I think they are significant in describing the muscle that China is now looking to flex in the Asian region. Through becoming a significant trading partner it is now seeking to re-write old notions. For some time, Japan has followed a theory first enunciated by Yukichi Fukuzawa (1868-1912) Where Japan should seek to distance itself from Asian neighbors. At the Tokyo Consensus, a statement released at the end of the Beijing-Tokyo Forum suggested that given Japan’s trade with China now exceeds that with the US perhaps Japan should “return to Asia and keeping close to the US.”
This would see a significant change in US power in Asia. It is one more check in my view that whoever rules trade writes their own global ticket. Over the past decade, China has moved up the trade partner list in Asia, Latin America and Africa. In many parts of the world it has overtaken the US as the primary trade partner.
The primary trade partner gets to demand a number of things. (1) which currency is to be used as the medium of exchange, and (2) how votes should be made in international forums.
China has already signed significant FX swap agreements throughout Asia, and is now looking to expand these agreements throughout Africa and Latin America. These agreements cut out the need for the USD in international transactions. It is early days; but as China seeks to use its own currency for trading purposes, the USD will begin to lose some of its glitter. There was a time when GBP was the global currency, when the UK ‘Ruled the waves.’ This was later supplanted by the USD, as the US navy took over from the UK following WW2.
Watching trade is very important. Throughout history the largest trade partner has dictated terms internationally. The US is gradually giving up this title to China, as the Tokyo Consensus and the ASEAN meeting show.