This text is from blog famous currency strategist Joel Kruger .
The Euro has broken higher on Tuesday and although late August price action can often be dismissed as nothing more than volatility generated on lighter thin trade, in this case, the move is plenty justified. Technically, Tuesday’s push back over 1.2400 comes as no surprise, as I have been looking for the market to head higher for many weeks now, with a well publicized objective around 1.2600 (38.2% of 2012 high-low move and 78.6% of June-July high-low move). However, fundamentally, there has been a key development in recent hours, which has served as the primary driver behind this latest surge.
Several weeks back, ECB President Draghi stepped up in a big way, and made a serious commitment to do whatever necessary to stabilize the Eurozone and preserve the Euro. While the move was only a gesture, the fact that this was the first time throughout the crisis where there was a legitimate sense of leadership, was enough to bolster sentiment a good deal and restore confidence in a European financial system that desperately needed it. Still, there were many skeptics who questioned the talk, with one of the key mitigating arguments, that the Draghi comments were all but meaningless given Germany’s seemingly strong opposition to the implementation of any plan that would back Mr. Draghi’s strong words. But today, comments from Germany’s ECB director Jorge Asmussen, caught many off guard and were a major source of renewed optimism in the Eurozone.
Asmussen’s remarks that “a currency can only be stable if its future existence is not in doubt” echo the strong sentiment expressed by the ECB President, and represent a very strong support to Mr. Draghi’s bond rescue plan. Additionally, Asmussen’s statement that ECB bond purchases could be “unlimited” in scope is also a big deal, in that it helps to quash any bets on an EMU breakup, while dramatically reducing what has been classified as convertibility risk (“risk that a given currency can not be freely exchanged or delivered for another exchangeable hard currency”). Germany’s opposition to bond purchases throughout the Eurozone crisis has been a major roadblock, and now, with the Merkel appointed Asmussen stepping up to the plate, it sends a strong message that Germany is now behind the ECB’s plan to take the necessary measures required to stabilize the region.
This is a game changer as Mr. Ambrose Evans-Pritchard eloquently points out in today’s Telegraph piece, as it shifts the landscape within the region and helps to build momentum towards a cohesive solution. When Mr. Draghi stepped up a few backs back, I had already called that a major turning point in the crisis, as it finally represented a willingness for someone to step up and take the necessary leadership role that markets were so desperately seeking out. In my report on that day, I distinguished between the US response to the crisis in the fact that the US, having only one government making the decisions (right or wrong), was comforting enough to help rally the US markets. Again, sometimes the presence of leadership and order can be far more important than the decision making itself. And so today, the Euro has pushed higher on this German backing, and still could head a good deal higher in my opinion, as a result of the weight behind this story.
Moving on, just one more development on the day worth mention was the release of the RBA Minutes. Once again, the Australian central bank mistakenly showed no real concern for the potential threat of an accelerated China slowdown, and remained relatively upbeat with its outlook for the local economy. The view is extremely misguided in my opinion, and I continue to scratch my head, desperately attempting to make sense of this disconnected RBA stance. At the very least, the tone of RBA language should be a little more cautious in light of what I believe to be a much bigger potential China threat to the Australian economy. I do however find comfort in the latest BOJ Nishimura comments that China faces a “danger zone” and an article out of the WSJ entitled “Australia’s Boom is Losing Steam” that paints a more accurate and concerned picture of the Australian economy.
The downbeat China and Australia headlines on the same day as this German backing of the the ECB bond buying plan aligns well with my theory for a three phase global recession (US, Eurozone, China). The Asmussen support moves us further away from the risk of additional meltdown in the Eurozone and at the same time, closer to the onset of the third phase of the crisis, where China and its correlated commodity bloc and emerging market economies take center stage as the leading characters in the next major meltdown.