Sticking with currencies for a bit longer, there are some big shifts going on beneath the surface.
From Bloomberg, April 20:
The remorseless strength of the U.S. dollar as the global haven is starting to cause problems — and not just in emerging markets. Japan and Europe have traditionally preferred to have their currencies run a little weak to the dollar to boost exports. But the slide this time is worrisome. The yen has fallen to its weakest levels in two decades, testing the Bank of Japan's resolve in maintaining a lid on bond yields. The eurozone, however, is where the most discomfort is felt because it is exacerbating inflation, in part because imports become more expensive. The common currency anchors the European Project so a precipitous drop risks becoming existential for continental unity in a way that yen weakness doesn’t.
The euro has declined steadily for the past year from above 1.22 per dollar to within close range of the 1.0640 low of March 2020, when the pandemic first hit. A test of parity to the dollar later this year is no longer a low-probability risk. A currency crisis of confidence is the last thing the European Central Bank needs. It already faces an almost impossible choice between counteracting soaring imported inflation or risking a renewed recession. But doing nothing is rapidly ceasing to be an option.
Imported inflation is exacerbated by the war in Ukraine because much of Europe’s energy purchases are priced in dollars. A weaker euro just magnifies the short-term problem. It is a reverse of the situation for most of this century when an arguably underpriced common currency drove exports to China and Russia. Those trade partners are either slammed shut or suffering their own economic downturn. It doesn't help when the U.S. Federal Reserve seems to be on a mission to raise interest rates at the fastest pace in decades to combat its own inflation surge. The differential to negative rates in Europe is glaring.
The only logical answer is for the ECB to raise its official deposit rate from the current super-stimulatory negative 50 basis points. But it must also ever-so-carefully keep financial conditions lax via other monetary tools, such as bank lending incentives. While bond yields have moved multiple times higher in Europe than in Japan, the ECB has not yet offered any meaningful support for the euro. Something's got to give and the first step is to stop its QE bond-buying programs by early summer and pave the way for the first rate hike in September....
....MUCH MORE
Earlier today: Capital Markets: "Dollar Surges into the Weekend".
And recently:- German Producer Price Inflation Hits 30.9% YoY
- Capital Markets: "The Yen Bounces after 13-Day Slide and BOJ Defends Yield Cap"
- "JPMorgan: Immediate EU Ban On Russian Oil Could Send Prices To $185
- "How an energy embargo will impact German CPI"
- The Chinese Yuan is Flirting With a Breakdown
And Albert, March 30:
Société Générale's Albert Edwards Is Seeing Possible Chinese Currency Devaluation
That would not be good for Germany. Not at all
On the export front it means Chinese exports getting more competitive simply by virtue of the currency, competition that furthers the slowing of an already slowing German economy.....
"The eurozone’s banking instability" (A euro catastrophe could collapse it)
