Watch Europe for the next leg lower in the Australian dollar

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Via Gavyn Davies at the FT:

Up to now, there has been no compelling fundamental narrative that would account for the eurozone slowdown. But there are two possible candidates. The first is that the effects of the ECBs belated shift to quantitative easing in January 2015 have now started to wane. Although this policy change did not involve a large drop in real policy rates, it did succeed in reducing bank lending rates and bond yields throughout the eurozone, and also restored the provision of bank credit in the troubled economies. It is conceivable that this impetus moved past its maximum effect on the growth rate in 2017. Fulcrum economists estimate that the monetary impetus was adding about 1 percentage point to eurozone activity growth in mid 2017, and this has now entirely disappeared. Furthermore, forward short rates in the eurozone began to rise last year as the markets anticipated future ECB normalisation of monetary policy.

A second possible explanation is that the growth rate during 2017 was simply too far above the long run growth rate for this situation to be sustainable indefinitely. Supply constraints may have started to bite. The Fulcrum nowcast models had anticipated a gradual return to trend occurring in 2018, and they now seem to interpret the data as being consistent with a much sharper return to trend than was previously expected.
The ECB will probably give the economy the benefit of the doubt at the next Governing Council meeting on 26 April. It has been very confident that a strong, above trend upswing will continue this year, and will be reluctant to change their assessment based on a couple of months’ data.

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About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.