With the introduction of the world’s first major negative interest rate, I believe it was fully expected that the euro would devalue. After all, it sounds very much like an act of debasement, intentional and heavy, that should move the currency “markets”, but that has not been the case. In fact, the euro appears as much captured by confused stasis as certain important pieces of dollar credit and funding.
That has been at least perplexing for the pure theorists, and for more than a few traders that were seeking a different kind of paradigm. From Bloomberg:
The currency “is barely budging” as a result of the Ukraine news, Douglas Borthwick, the head of foreign exchange at New York brokerage Chapdelaine & Co., said yesterday by phone. “We’ve never seen this little volatility.”
The dreaded “dead” market seems to have struck one more time. The “blame” is being courted by a shift in sentiment, away from that dependent on what is happening in Europe and more toward that of US “normalization.” However, that makes very little sense because US policy toward higher interest rates, as this narrative assumes without account of bear flattening almost everywhere, should also be weakening the euro. Draghi’s debasement gambit, together with Yellen’s forward guidance jawboning, should be moving the euro in the “intended” direction – not kept calm and stagnate.
Going all the way back to the November 2013 corridor “adjustment” by the ECB, the dollar-euro cross (not to be confused with eurodollars, which are something completely different) has been consistently locked between 1.35 and 1.40. That is, on its own, pretty amazing given all that has taken place in not just the US and Europe, but globally in terms of economics and what appears like a steady erosion of stability (which includes the economic).
That narrow range confounds the ideas that Bloomberg, and ostensibly the targetists of each central bank, are trying to use as explanative. Since monetary policy is always believed to be effective by the orthodoxy, including most of the media, such implausibility is required to preserve the high degree of purported central bank omniscience.
This is not the only currency, however, to be so captured by nothingness. I noted earlier in the year the yen-dollar cross which seems to be wound even tighter that the euro. Despite the “will he, won’t he” debate over Abenomics’ next move, the yen has gone nowhere, seemingly pegged to around 102.
At least in yen “trading” we can directly observe a potential US$ culprit, as the range appeared in tight coincidence to Janet Yellen’s first official day as Chairman. That is also the same time as swap spreads and gold, inexorably held close to $1,300, have fallen largely silent (meaningless was the term I used previously).
But for the yen, such sideways nothingness has actually appeared on two prior occasions, both taking longer to “resolve” than the current apathetic range.
Just prior to the euro crisis reaching its crescendo in August 2011, the yen/US$ went silent. It was somewhat lost in the overwhelming noise of PIIGS and ECB comedy, but there was a significant Japanese flavor to that crisis period. Japanese banks were the second largest users of the Fed’s reinstituted dollar swaps, and that persisted well into the LTRO period.
Perhaps not coincidentally, the euro behaved similarly prior to this very period. While not as neat and obvious as the yen, the dollar-euro cross appeared stuck in a range from May 2011 until the Swiss National Bank threw in the towel in mid-September 2011.
There, as now, the range was limited to about 0.06 (from around 1.40 to 1.46) – just prior to devaluing steadily enough, despite all the LTRO’s and EFSF’s, to finally get Mario Draghi’s blanket, and unspecified, “promise.”
The other such instance of “deadness” in currency trading was the yen in the middle of 1999.
Only a few months after the Bank of Japan unleashed ZIRP for the first time in history (yes, fifteen years of it and what has it accomplished? A bunch of jobs “saved”?), the yen idled into narrowness that lasted more than fourteen months, which is quite impressive for a “market.”
I think what ties all these together are the contemporary contradictions between central bank assurances, leading to discrete actions intended to bring about promised results, and the lack of actual progress toward those ends. In 1999, ZIRP was supposed to shock the Japanese out of “deflation” (poorly defined here) and bring about a full recovery. Yet, all through the rest of the year and throughout 2000 there was nothing at all like a recovery; in fact, to the growing disbelief of central bankers, Japan fell back into “deflation” and recession by 2001 without any real growth in between.
The same could be said of Europe in 2011, where central bank promises and what were then believed to be powerful monetary measures were thrust upon market agents as “solutions” though conditions never really responded to them as such. That also describes the current predicament in 2014, whereby asset prices are robust, as are recovery narratives, but not so much in actual terms of true wealth and economic distribution. To use a Yogi Berra corruption, it’s the same old, same old once again.
Stepping back from the granularity of just range-bound currencies (and gold), it seems, to me at least, as if “markets” want desperately to believe these promises but are not willing to engage more fully toward those ends (I am, obviously, excluding certain “risk” markets like stocks and junk bonds – which would include PIIGS sovereigns). At the same time, however, it looks like these markets are willing to at least give central bank targets and programs the benefit of the doubt by not simply betting in the opposite direction with emphasis. The lack of conviction to either side is what stands out in all of these.
That remains true, at least until the “good will” is exhausted and promised outcomes fail to appear – in fact, the opposite outcome that was originally feared is what always ends up taking place. So these confused stasis periods of meaninglessness may simply be that market agents see the coming steamroller but just cannot help themselves from leaving behind any nickels placed in front by these central banks. With stock prices, and some bonds, at record levels, those are some pretty big nickels; but judging by all the dead markets, so is the potential flattening power of the steamroller.
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