FX Macroeconomics
have them happily defaulting. It is clear that this is a game played on razor’s edge. To convince both Bundestag and Club Med, a loud and dramatic voice is needed, but it is obvious as well that some declarations could cause even more dramatic effects when the reader is in the US and is already short most European assets. What makes us think on the positive side is the fact that if Germany was really evaluating to abandon the Eurozone periphery to its destiny, it would not at the same time short-ban its assets, generating market anger. In the end, anyway, the most p o w e r f u l argument that the German g o v e r nm e n t is using is that not a single grain of
inflation
will come out from Euro d e p r e c i a t i o n and
from
ECB actions. Wage inflation is a distant memory. As far as commodities are concerned, p r o d u c e r s think in terms of purchasing power more than in Dollars and, if the Dollar gets stronger they are ready to accept a smaller
quantity of them. The fact that each time tensions arise on the markets the oil supply gets plentiful shows that exporters are quite careful in stabilizing the world in this delicate phase. No inflation then, it is this that really matters. How many Americans outside Wall Street could tell if Euro is currently worth 1.00, 1.20 or even 2.00 Dollars ? Likely not many, and if inflation is not existing , nobody cares. It is not going to be much different in Germany. In more practical terms, we report that IMF’s Lipsky just stated that Eur/Usd exchange rate is now at equilibrium level.
you, as far as Euro’s weakness goes, that is enough. Actually the IMF has always argued that this is the optimal level. There is nothing wrong with having the Euro undervalued for a couple of years after a long period of overvaluation, if markets will keep pretending that the States are sounder than Europe. It is actually worth questioning why all this drive to sell government bonds of half of European countries now that some growth is showing up, and not 15 months ago when the world was seemingly falling in an ever ending abyss ? The reason is that, at that time, stock markets were quickly sold and money was parked in the first option a v a i l a b l e , d o m e s t i c g o v e r n m e n t bonds. Today, European assets are quickly sold and money is parked in Tr e a s u r i e s , hoping to find some peace, but it will not be like this
forever. Our flag is flying in front of us. FDJ demonstration.
Lipsky is the US man at the IMF and this could mean that the United States are saying : thank
28 FX TRADER MAGAZINE July - September 2010
After two ex Fed governors ( G r e e n s p a n
and Volcker) have been vocal on the worrying American balance sheet, now even an ex MoF,
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