Ransquawk

Inflation target becoming obsolete

The first issue facing the new Chairman if the Federal Reserve when the takes over in a little over a months’ time will be to understand just what his challenges are. He will take over an economy that is growing at a decent rate and inflation that seems well controlled by three rate hikes in the past twelve months.

As always, the reality is different. G7 Central Banks all have the same target for inflation of 2%. Japan is the furthest away from that target on the downside while the U.K. still deludes itself that “weakness” of Sterling is the cause of its inflation rate that is more than 50% above target.

The idea of the possibility of a rate hike in Japan has given a slight edge to the JPY recently but the BoJ still eyes a weak currency as a support for the country’s exports.

The BoE hiked rates then, much to the market’s amusement, decided to tell all and sundry that they didn’t intent to do so again for some considerable time. This had the effect of holding the pound lower while increasing the debt burden on a consumer facing a difficult winter while still trying to prop up the economy.

Brexit capitulation to set the tone for stage two

Can there be any other explanation for Theresa May still being U.K. Prime Minister than she is being allowed to continue until all her options are exhausted and her premiership collapses on its own? Also, it cannot be a coincidence that there are so many films being released about Winston Churchill, perhaps Britain’s greatest ever statesman and Prime Minister!

Stage two of Brexit negotiations will begin as winter turns to spring but that will be the only thaw that will be seen as  relations remain decidedly frosty. The offer made by the U.K. over the treatment of branches of Eurozone banks following Brexit was batted back unceremoniously by Brussels who made it very clear that it expects further capitulation to allow a soft Brexit to take place. The prospect of a hard Brexit has all but been removed while Mrs. May remains in place as the more hawkish members of her Government allow events to take their own course.

The pound has managed to cling to support levels, but it can only be a matter of time before the weakness of the economy coupled with rising inflation, both a product of Brexit, take a fatal toll.  

Euro facing future with confidence

It has been said that the Euro faces major issues when the ECB starts to divest itself of the portfolio of assets it has purchased as part of additional accommodation put in place at the height of the debt crisis. The value of those assets has been called into question but as is the case with such “investments”, no one will know their price until they come to be sold or redeemed.

Mario Draghi is either a very astute Central Banker or the President of the biggest Ponzi scheme since Madoff. If his refusal to countenance the sale of assets to tighten monetary policy is indeed to help the weaker economies continue to grow he could be hailed as a genius. However, at some point, the sales will have to take place and if there is no value to be found, the Eurozone and therefore the common currency will be plunged into another crisis.

As the New Year begins most favour a stronger Euro, again by default. This time it is expected that the dollar will weaken as any further increase in interest rates in the U.S. is “put on the back burner” until the future source and path of inflation become clearer. The dollar index has strong support at 92.50 but a fall through that could see 90.00 very quickly.

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