ECB fights the Fed

See the latest Australian dollar analysis here:

Australian dollar surges into global economic stall

The ECB is back in the game. Here is last night’s statement:

Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to our press conference. We will now report on the outcome of today’s meeting of the Governing Council, which was also attended by the Commission Executive Vice-President, Mr Dombrovskis.

The resurgence in coronavirus (COVID-19) infections presents renewed challenges to public health and the growth prospects of the euro area and global economies. Incoming information signals that the euro area economic recovery is losing momentum more rapidly than expected, after a strong, yet partial and uneven, rebound in economic activity over the summer months. The rise in COVID-19 cases and the associated intensification of containment measures is weighing on activity, constituting a clear deterioration in the near-term outlook. In fact, while activity in the manufacturing sector has continued to recover, activity in the services sector has been slowing visibly. Although fiscal policy measures are supporting households and firms, consumers are cautious in the light of the pandemic and its ramifications for employment and earnings. Moreover, weaker balance sheets and increased uncertainty about the economic outlook are weighing on business investment. Headline inflation is being dampened by low energy prices and muted underlying price pressures in the context of weak demand and significant slack in labour and product markets.

The monetary policy measures that we have taken since early March are helping to preserve favourable financing conditions for all sectors and jurisdictions across the euro area, thereby providing crucial support to underpin economic activity and to safeguard medium-term price stability. At the same time, in the current environment of risks clearly tilted to the downside, the Governing Council will carefully assess the incoming information, including the dynamics of the pandemic, prospects for a rollout of vaccines and developments in the exchange rate. The new round of Eurosystem staff macroeconomic projections in December will allow a thorough reassessment of the economic outlook and the balance of risks. On the basis of this updated assessment, the Governing Council will recalibrate its instruments, as appropriate, to respond to the unfolding situation and to ensure that financing conditions remain favourable to support the economic recovery and counteract the negative impact of the pandemic on the projected inflation path. This will foster the convergence of inflation towards its aim in a sustained manner, in line with its commitment to symmetry.

In the meantime, we decided to reconfirm our accommodative monetary policy stance.

We will keep the key ECB interest rates unchanged. We expect them to remain at their present or lower levels until we have seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2 percent within our projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics.

We will continue our purchases under the pandemic emergency purchase programme (PEPP) with a total envelope of €1,350 billion. These purchases contribute to easing the overall monetary policy stance, thereby helping to offset the downward impact of the pandemic on the projected path of inflation. The purchases will continue to be conducted in a flexible manner over time, across asset classes and among jurisdictions. This allows us to effectively stave off risks to the smooth transmission of monetary policy. We will conduct net asset purchases under the PEPP until at least the end of June 2021 and, in any case, until the Governing Council judges thatthe coronavirus crisis phase is over. We will reinvest the principal payments from maturing securities purchased under the PEPP until at least the end of 2022. In any case, the future roll-off of the PEPP portfolio will be managed to avoid interference with the appropriate monetary policy stance.

Net purchases under our asset purchase programme (APP) will continue at a monthly pace of €20 billion, together with the purchases under the additional €120 billion temporary envelope until the end of the year. We continue to expect monthly net asset purchases under the APP to run for as long as necessary to reinforce the accommodative impact of our policy rates, and to end shortly before we start raising the key ECB interest rates. We intend to continue reinvesting, in full, the principal payments from maturing securities purchased under the APP for an extended period of time past the date when we start raising the key ECB interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.

We will also continue to provide ample liquidity through our refinancing operations. In particular, our third series of targeted longer-term refinancing operations (TLTRO III) remains an attractive source of funding for banks, supporting bank lending to firms and households.

The FT notes that the central bank is on track to buy more sovereign bonds than are issued in total over the next year:

Investors will not have to contribute a single euro to finance the vast budget deficits of eurozone governments next year, according to analysts who forecast that the European Central Bank will buy a greater quantity of debt than all the new bonds hitting the market.

Draft budget plans published by EU member states earlier this month showed that deficits are expected to remain sky high even as economies rebound from the effects of the Covid-19 pandemic.

But, according to calculations by Citigroup, ECB purchases will more than cover the extra cash that governments need in 2021 — even if the central bank does not scale up its €1.35tn emergency bond-buying programme by another €500bn in December as is widely expected. Christine Lagarde, the ECB’s president, hinted at a policy-setting meeting on Thursday that further stimulus is on the way.

This should be bullish, right? MOAR liquidity etc.  The problem is that the statement was more dovish than the market (not me) was expecting and the ECB is now clearly fighting the Fed.

Europe is leading the lockdowns as well and its inflation profile is much weaker than the US:

Yet it is unlikely to provide another round of fiscal stimulus, relying more on the ECB.

This is not the profile of rising currency, as the EUR has been all year. Especially since, once US election fears ease, its fiscal program will resume more strongly than in Europe delivering better growth and inflation outcomes.

It is certainly true that a recovering US is bullish for the EUR as capital flows outwards and its exports lift, but the virus is forcing the ECB to fight the Fed now and until we get some whiff or a stronger US recovery then that is going to put more upwards pressure on DXY which, in turn, is bad for reflation everywhere, especially commodities and the Australian dollar.

This will act as a brake on global recovery, on gold, on commodities, on AUD appreciation and on all reflation next year.

David Llewellyn-Smith
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  1. I know you all disagree with me and all the analysis points to me being wrong

    I just can’t see Biden beating Trump

    Biden $1.40
    Trump $2.80

    I had a look yesterday did you know Bill Shorten was $1.19 going into last year federal election

    If trump did win, can you imagine DXY with Europe a disaster and look at CFTC EUR open positions

    The market is the longest EURUSD in history nearly

    Market Shortest USD

    DXY will go straight through 100

    • I was thinking Trump was gonna win for sure, up until recently. Then I thought Biden was gonna win, just because he’s not Trump. But Trump supporters are fanatical and somehow I think he’s going to get a second term. But i’m not willing to bet on it.

      • It isn’t the fanatical Trump supporters who are going to determine the election. It is the swing voters. The fanatical left and right pretty much cancel each other out in terms of numbers.

        • Yes that’s why I think this time he won’t win. His base won’t budge either way and people are less afraid to be vocal about supporting him now, so I think the undecided quiet voters won’t count this time and he’s turned enough people off with his rhetoric and mania that I just can’t see how people could vote for him, outside of suffering stockholm syndrome.

    • I would just observe that Shorten ran the biggest target campaign from Opposition since John Hewson. And got the same result. Biden is running like Howard did here in 96. Small target, just letting the incumbent remind everyone of his negatives by not getting between him and his adoring 40%. The only concern I have for Biden is that we are seeing polls with him below 50% for the first time in months. Apart from Trump looking to steal the election by any means he can ….

  2. WTF alright. Another non medical, medical expert! You can’t make this shit up, “he’s been searching for the root cause of chronic disease since 2012.”