The weakness of the US dollar and the shape of Bund yield curve
The road to EUR/USD =1,20 is now clearly open. If 1.20 target will be reached , the impact of such a big currency move in the E.Z. inflation will be pretty quick and not temporary. Because it will be linked , at the same time, to a low WTI price.
ECB is perfectly aware that the euro bounce (together with low oil prices ) will lower all inflation forecasts (PPI and CPI ) . I do not agree with the most part of analysts about the timing and pace of ECB normalization ( they think ECB will start the tapering of QE in the spring of 2018) . I think that , if eur/usd cross currency rate will get 1.20 level ( and will remain there for some time) , it will be very difficult for ECB to address a QE tapering …We cannot ignore , either, the effect of a currency move on exporters and importers, with negative growth implication for E.Z.in the medium term…ECB is probably concerned about such a speed of the euro rise, regardless of the level. ..
Anyway , this FX move will have an outcome on the shape of the euro benchmark yield curve ( towards a flattening , I mean) . We have to pay a lot of attention to Mario Draghi’s speech at Jackson Hole : if the euro will strenghten too much in too short period of time , I don’t think any tapering of QE will be possible in the 1H of 2018 .
FX moves will affect current imbalances of the E.Z. as much as they will affect inflation expectations. So , if EUR/USD will remain in the 1.20-1.22 range , I think ECB will be a little frustrated to see more and more distant the goal of 2% inflation in the medium term. If the 1.20 target will be reached in September, bond markets will enter in the “no –tapering” mood … in this case I won’t be surprised to see the 10y Bund at 0,30% or lower … Look at the EUR 5y5y swap inflation rate : from 1.80% in February it went down to 1.59% recently (and 1.50% target is not so far away from here) .
It's been difficult to me to understand that, in the short term , FX moves are no more related to rates differentials. They are related to geo-political risks. ( Trump’s impeachement risk for example) . So, we’ll probably see more euro strength and more flattening of the Bund yield curve .
Banker presso Ersel
7yHi Jose' ... thanks for your question...All I want to say is that a lower US Dollar automatically means lower commodity prices , expecially Oil and gazoline, and that means inflation expectations will change in the E.Z on the downside...( think also that if Oil won't go beyond 50/55 USD pb, a low inflation scenario will be confirmed) .. Secondly, my view of eur/usd reaching 1,20 by the end of the year means also that euro zone exporters will struggle to be competitive in the USA and that means economists and analysts will have to lower their growth expectations for the euro-zone in months to come ( by 0,1% /0,2% not more ) ... finally , this new (deflationary) macro-economic scenario will stop ECB in her will to start tapering QE in 2018 ... and this will bring a flattening of the bund yield curve , because bond markets investors are now on the other side of expectations : they think E.Z. will have strong growth and higher rates , expecially on the long end of the curve ... Frankly, I don't think deflation will be definitively beaten in the E.Z. if the euro will be more and more stronger in months to come...
Sorry Renato, but how will this FX move flatten the European yeld curve (Bund)? I mean the FX move translates the expectations of higher interest rates in Europe due IMHO to a more sensible monetary policy (Draghi is right and Yellen is wrong). This will mean that the Bund yield will continue to grow and not flatten. Actually I don't see how the Bund will flatten.... It maybe that your political views are clouding your judgments.....