The Aussie-euro Carry Trade

A ringing denunciation of nanny state boot lickers, warfare state lickspittles, and country club quislings was promised at the close of yesterday’s Markets and Money. This is an equal opportunity outfit when it comes to giving offence. Tories, Labor, Liberal, Republican, Democrat — it doesn’t matter. If you’re an enemy of liberty, your political affiliation is less important than your lack of principles.

But before the comments on liberty, privacy, metadata, and money, a few market notes. Let’s begin with Europe. And by the way, how depressing is it that we live in a world where central bankers hold regular press conferences…and not only are they well attended by the media…but investors actually base decisions on what is said? We don’t have free markets anymore, do we? We have money printers calling the tune.

In any event, Mario Draghi, the current President of the European Central Bank (ECB) took to the podium yesterday. He said the Bank would continue its Targeted Long-term Refinancing Operations (TLRO). I call this asset laundering. The Bank’s goal is increase business lending by allowing major European banks to borrow cheaply from it (the ECB) using a wide variety of moribund assets as collateral. Draghi said the next round of TLRO would aim to inject €450–850 into the Eurozone economy.

 

The goal, of course, is to get inflation up. Eurozone inflation was just 0.4% in July. With Italy’s economy contracting, Portugal’s Bank of the Holy Spirit in trouble, and a slow-burning war in Ukraine, it’s no wonder businesses don’t want to borrow and invest. Why would they?

If the TLRO doesn’t do it, maybe outright purchases of asset backed securities will! Draghi said the ECB will hire a consultant to help overcome regulatory hurdles that prevent the Bank form buying asset backed securities. The goal is to get credit flowing in Europe again and get financial firms trusting one another. As is, the ECB has put itself at the center of the European credit system and made everyone dependent on it. That’s what smart drug dealers do too, apparently.

Until Draghi gets more serious about taking unconventional measures, don’t expect to see any reaction in European stocks. I do think it will happen eventually. Draghi, like his colleagues in the UK, the US, and Japan, is telling investors that he’s determined to weaken the euro. So far, that’s led to a rally in ‘safe’ German bonds. But to beat inflation once it gets going, look for a big move into equities.

It will be worth keeping an eye on the Aussie/euro exchange rate as well. In the past, you could make an argument that a weaker euro has led to a ‘carry trade’ that benefitted Australian asset prices. Investors borrowed cheaply in Europe to invest in higher-yielding Australian stocks and bonds or property funds (AREITS). If Aussie interest rates are headed down too, though, this trade may be less attractive.

Draghi made a point of saying that ECB monetary policy was now ‘divergent’ with US/Fed monetary policy. The suggestion is that the US Federal Reserve is closer to a tightening cycle while the ECB is still quite loose. By even saying that, Draghi is hoping to ‘jawbone’ the euro lower.

He’s wrong though. The monetary path of all central banks is now roughly the same: destruction. Let’s not forget we are in the midst of a massive academic experiment. The premise is that a few bankers with PhDs can manage complex economies with millions of people and businesses…by manipulating the price of money and credit. It’s an enormous, dangerous fraud. They’re taking us all on the road to serfdom.

By the way, Draghi also mentioned ‘geopolitical’ factors in explaining away low inflation and weak growth. He was referring to Ukraine. And on that note, Russia raised the stakes in the financial war with the West by slapping a ban on food imports from the US, Europe, Norway, Canada, and Australia! Does Russia look like the weak party at the moment? Or is the world’s balance of power realigning as we speak?

 

Regards,

Dan Denning
For Markets and Money

 

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Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.


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