It's an Anglo Thing

The central bank race to cut and print has now turned into the race to hike and reduce, with North America leading the charge, and the Anglo cousins trailing slightly behind. The Fed has passed the hurdle of raising interest rates and has moved on to addressing a reduction in the balance sheet, which itself has been flat for the last three years. Additionally, The BOC and BOE are both signaling that its days of increasing quantitative easing and lowering rates have come to an end, and the next moves in interest rates are more likely to be hikes rather than cuts. This leaves the ECB and the BOJ far behind the curve, as Mario "any means necessary" Draghi still hints toward more quantitative stimulus, and has not made clear any plan to address a reduction in the balance sheet any time in the near future. The general concern among central banks seems to have made a U-turn: "how will the Fed ever raise interest rates without triggering a recession" has turned into "how will the ECB and BOJ ever get on the same rate path as the Fed, The BOC, and The BOE.

It's an Anglo Thing

The central bank race to cut and print has now turned into the race to hike and reduce, with North America leading the charge, and the Anglo cousins trailing slightly behind. The Fed has passed the hurdle of raising interest rates and has moved on to addressing a reduction in the balance sheet, which itself has been flat for the last three years. Additionally, The BOC and BOE are both signaling that its days of increasing quantitative easing and lowering rates have come to an end, and the next moves in interest rates are more likely to be hikes rather than cuts. This leaves the ECB and the BOJ far behind the curve, as Mario "any means necessary" Draghi still hints toward more quantitative stimulus, and has not made clear any plan to address a reduction in the balance sheet any time in the near future. The general concern among central banks seems to have made a U-turn: "how will the Fed ever raise interest rates without triggering a recession" has turned into "how will the ECB and BOJ ever get on the same rate path as the Fed, The BOC, and The BOE.

Draghi and the ECB Forcing Potential Dovish Move From Fed

Will Yellen and the Federal Reserve simply stand idle while Draghi and the ECB one-up them by increasing both the quantity of "Quantitative Easing" purchases and the length of the program? Because last Thursday the ECB announced that it plans to increase the scale of their QE printing program from 60,000,000,000 a month to over 80,000,000,000 USD per month, or exactly 1,075,200,000,000 USD annually, which makes the ECB's annual bond purchases 55,200,000,000 greater than Fed's most recent QE program. Furthermore, in addition to extending the length of the program to 14 months, Draghi also made it clear that the actual length of the program could be indefinite if economic circumstances render it "necessary."

The primary concern for the Fed is offsetting the potential effect that an Infinite Draghi Put could have on the dollar. Draghi has made it clear that he will stop at nothing in order to avoid deflation and hit the ECB's 2% inflation objective, as evidenced by his remarks regarding QE, stating that the end date of the monetary easing program is tentative and did not make any reference to a maximum threshold for QE or a minimum threshold for interest rates. Since low velocity of money in the euro area has dampened the inflationary effects that one would expect from the ECB's QE, and forecasts for sub 2% global growth do not provide any clear tailwinds for economic activity, Draghi has, and will continue to have to, resort to printing/devaluing the Euro in order to meet his unilateral inflation objective. Draghi telegraphed this to markets by announcing an increase in bond purchases at each consecutive one of the previous three ECB press conferences (will Greece be getting any of that free money? I think not. They'll be left to fight it out with the IMF for temporary revolving loans to keep their government from collapsing. Brexit Grexit, anyone)?

The problem is that the Fed, too, has inflation objectives; the Fed, too, wishes to avoid deflation at all costs; and a weaker Euro resulting from Draghi's kamikaze policy necessarily implies a relatively stronger USD, of which the Fed has little utility, in terms of its dual mandate.

Notwithstanding, Draghi and the ECB waited until the Fed washed their hands of QE before unleashing the mother of all QEs: an increase in the ECB's QE program by +33, an extension of the program until well after the US elections (and "further if necessary"), topped off with negative borrowing costs. Draghi appears to be in the exact position that Yellen wishes to be in, given that it has been eight years since the last recession, the business cycle is currently overextended, and QE with NIRP is likely the only option to cushion a severe slowdown.

On the other hand, Yellen and the Fed are in a relatively opportunistic position; they have more room to move than the ECB does, as the 10Y is still well over 1%, they haven't been forced to take rates into negative territory, and they still haven't done a Reverse Operation Twist or QE4. Slowing global economic growth as forecast by the IMF earlier in the month may mean the Fed will be forced to use those tools, however, optionality gives them relative strength, as all of the ECB's cards appear to be on the table.

Draghi's decision to ramp up QE even further and extend the program indefinitely is certainly an impediment to the Fed in terms of its ability to maintain downward pressure on the dollar while entering into the final stages of the present business cycle.

Draghi and the ECB Forcing Potential Dovish Move From Fed

Will Yellen and the Federal Reserve simply stand idle while Draghi and the ECB one-up them by increasing both the quantity of "Quantitative Easing" purchases and the length of the program? Because last Thursday the ECB announced that it plans to increase the scale of their QE printing program from 60,000,000,000 a month to over 80,000,000,000 USD per month, or exactly 1,075,200,000,000 USD annually, which makes the ECB's annual bond purchases 55,200,000,000 greater than Fed's most recent QE program. Furthermore, in addition to extending the length of the program to 14 months, Draghi also made it clear that the actual length of the program could be indefinite if economic circumstances render it "necessary."

The primary concern for the Fed is offsetting the potential effect that an Infinite Draghi Put could have on the dollar. Draghi has made it clear that he will stop at nothing in order to avoid deflation and hit the ECB's 2% inflation objective, as evidenced by his remarks regarding QE, stating that the end date of the monetary easing program is tentative and did not make any reference to a maximum threshold for QE or a minimum threshold for interest rates. Since low velocity of money in the euro area has dampened the inflationary effects that one would expect from the ECB's QE, and forecasts for sub 2% global growth do not provide any clear tailwinds for economic activity, Draghi has, and will continue to have to, resort to printing/devaluing the Euro in order to meet his unilateral inflation objective. Draghi telegraphed this to markets by announcing an increase in bond purchases at each consecutive one of the previous three ECB press conferences (will Greece be getting any of that free money? I think not. They'll be left to fight it out with the IMF for temporary revolving loans to keep their government from collapsing. Brexit Grexit, anyone)?

The problem is that the Fed, too, has inflation objectives; the Fed, too, wishes to avoid deflation at all costs; and a weaker Euro resulting from Draghi's kamikaze policy necessarily implies a relatively stronger USD, of which the Fed has little utility, in terms of its dual mandate.

Notwithstanding, Draghi and the ECB waited until the Fed washed their hands of QE before unleashing the mother of all QEs: an increase in the ECB's QE program by +33, an extension of the program until well after the US elections (and "further if necessary"), topped off with negative borrowing costs. Draghi appears to be in the exact position that Yellen wishes to be in, given that it has been eight years since the last recession, the business cycle is currently overextended, and QE with NIRP is likely the only option to cushion a severe slowdown.

On the other hand, Yellen and the Fed are in a relatively opportunistic position; they have more room to move than the ECB does, as the 10Y is still well over 1%, they haven't been forced to take rates into negative territory, and they still haven't done a Reverse Operation Twist or QE4. Slowing global economic growth as forecast by the IMF earlier in the month may mean the Fed will be forced to use those tools, however, optionality gives them relative strength, as all of the ECB's cards appear to be on the table.

Draghi's decision to ramp up QE even further and extend the program indefinitely is certainly an impediment to the Fed in terms of its ability to maintain downward pressure on the dollar while entering into the final stages of the present business cycle.

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