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FX MACROECONOMICS


to pause (Q2 19 or Q3 19), the European Central Bank may begin to gradually liſt its deposit rate that is currently set at minus 40 bp. Te expansion cycle will likely prevent a new ECB President (October 2019) from being too a g g r es siv e. Thr e e -month E U R IB OR may only turn positive in Q1 2019.


Over this period, the UK will leave the EU. A risk of a disorderly exit appears


to have


increased but adjustments will be made, and a new equilibrium is likely to be found. Te EU itself will have a new commission, parliament, and heads of several other institutions. Tis is a pivotal time for Europe. Te reliance on the US is less assured. Te UK may not be happy with the results, but its victory in securing a broader EU leaves the European project with an uncertain outlook. Many observers do not grasp the moment, though Merkel does.


We have argued that securing German its


interest influence does not require


and projecting a


German at the head of the ECB. Regardless of Draghi’s replacement,


8 FX TRADER MAGAZINE October - December 2018


the next President will begin what will be a thankless job of unwinding extraordinary policy. Our suspicions have been confirmed by recent press report suggest Merkel sees the EC President maybe the European


policies, but the important takeaway is that these are likely to prove to be part of the new set of quasi- permanent policy tools for the Bank of Japan. Its balance sheet growth may slow (it seems reasonable to expect a reduction in ETF purchases over the next 18 to 24 months), and it may widen the band for the 10-year yield, but a band will persist. Te next known unknown is the impact of the sales tax hike due in October 2019.


Some


of the impacts may be offset by increased g o v er n m en t


Council as a more important than the central bank.


Tensions between the center- Brussels/Berlin/Paris-and the periphery, Spain, Italy, Greece, Portugal, and the Visegrad Group will ebb and flow. We expect a chronic low-grade fever with potential for occasional hallucinations, and while a full recovery in the period ahead is unlikely, terminal.


the scar tissue is not


We expect further adjustments to Japan’s Qualitative and Quantitative Easing and Yield Curve Control


spending and/or incentives. Te


2020 Olympics will be a showcase for Prime Minister Abe.


China can be counted on to report largely steady growth over the next 18-24 months. China appears to have a four-prong strategy.


First,


prepare for sustained trade conflict with the US over the period. Te likes of Lighthizer, Navarro, and Ross dominate the administration’s confrontational thrust. Tis means China will blunt the headwinds through monetary and fiscal policy and seek trade offsets for both inputs and markets.


It is hardly scratched


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