(Barcelona) - Stephen Gallo, European Head of FX Strategy at BMO Capital Markets has questioned whether the Euro is caught up in the political cycle.
He begins by noting that the morning session kept to the general theme of tighter EMU bond spreads and a buoyant EUR alive and well, against the backdrop of mixed Euro area data flow. Generally speaking, he feels that it remains the case that the building market consensus concerning the desire for a weaker EUR by the ECB, is not being met by the one thing which could actually sustainably soften the currency: wider spreads.
Presently, Gallo notes that the biggest fear he has for his weak EUR forecasts – particularly for the remainder of the quarter – relates to the fact that through tighter spreads and the effects of global capital flows, France, Spain and Italy collectively (and perhaps, indirectly, Germany through eventual positive macroeconomic spillover) may be getting pulled artificially higher by Anglo-Saxon Keynesian-like fluctuations (or, perhaps, Keynesianism on steroids). He writes, “If there is one thing we should have taken with us throughout the last decade or more, it’s that Keynesianism wins votes.”
He explains that this is why the recent anti-austerity push is important for both market psychology and the EUR. He has looked at number of variables including anecdotes, and what he can see are budding perceptions that Keynesianism is what will ultimately hold EMU together, when really, what will hold EMU together over the long-term are models of growth which sustain competitiveness and/or keep debt burden sharing minimised.
By this he means that all countries must either be competitive or live within their means, but not neither. Along with debt restructurings, structural reforms and write downs, Gallo feels that this fact ultimately means more EUR-negative macroeconomic adjustment will be needed in due course. He writes, “One way or another, either excessive ECB money printing or incongruous and inappropriate macroeconomic models of growth over the long-run will ultimately force a failure of EMU as the intra-bloc political threads unwind entirely.”
In the short-run, however, he and his team are inclined to view German and ECB ambivalence to continued spread compression as a sign that the CDU may be seeking to win “EUR-stability” votes in the run-up to the Q3 parliamentary elections, whilst minimising negative macro-economic spillover from France, Italy and Spain. He feels that if this is a burgeoning trend, he expects that the EUR will actually fall very little, all things being equal, until after the Q3 elections are through.
Incidentally, and also over the very short-run, he suspect that what the JPY crosses may need next – in order to secure additional upside – is for positive growth momentum and rising rate spreads over Japan to occur simultaneously. He finishes by commenting, “In an aggressive way, this is not something we’ve seen since before the end of the global carry trade in 2007-2008. G-7 growth ex-Japan which is sustainable in spite of rising interest rates can set the JPY free.”
Stephen Gallo, European Head of FX Strategy at BMO Capital Markets has questioned whether the Euro is caught up in the political cycle.
(Market News Provided by FXstreet)