Keith Underwood 3 Comments

Negative Interest Rates: A Disincentive to Risk

When all else has failed, use taxes to influence investment decisions. That, to me at least, seems like the approach that 16 countries that have issued some $8 trillion of debt that are trading at negative interest rates. In effect, tax savings with negative rates to encourage investment in risky assets. Well, that’s the theory behind the negative rates but I’ve never met a tax that achieved the expected outcome. Rather, taxes typically encourage avoidance and reduce the chances of succeeding. Negative interest rates will not reverse global demographic trends (aging) and technological advances (transparency of price). In fact, they will potentially aid in reducing growth in those countries and inflict a cycle of lower growth and persistently low inflation.

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Notable events the week of 26th January 2015

Tuesday the 27th:

UK GDP (1st Est.) q/q: market expects 0.6 versus 0.7 prior

Federal Reserve FOMC meeting begins


Wednesday the 28th:

Australia CPI q/q: market expects 0.3 versus 0.5 prior

FOMC – Fed Funds Rate: market expects 0.25 versus 0.25 prior

RBNZ – Cash Rate:  market expects 3.5 versus 3.5 prior


Thursday the 29th:

German HICP (Prelim.): market expect -1 versus 0.1 prior


Friday the 30th:

Eurozone Flash HICP: market expects 0 versus -0.1 prior

Canadian GDP: market expects 0 versus 0.3 prior

US GDP Annualized (1st Est.): market expects 3.1 versus 5 prior

Keith Underwood No Comments

Karl Otto Pöhl – the man behind price stability

The Bundesbank announced yesterday that Karl Otto Pöhl, former president of Germany’s central bank, died at age 85. For those of us who traded currencies during his tenure at the central bank, we remember him as always being resolute in his belief that price stability should be the core of everything that the central bank represents. This faith is still in practice today at the ECB, thanks in a large part to Mr. Pöhl.

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Keith Underwood 35 Comments

Greece, the petulant child of Europe

Once again, the Greeks are throwing the toys out of the pram over budget and bailout negotiations. Their actions have renewed awareness that this country has not solved all of its financial woes and this carries geopolitical risks.   An equity shocker such as this combined with a 30% drop in oil will add volatility to all asset classes as adjustments to risk must be made.

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November Non-farm payrolls

Just in from the US Bureau of Labor Statistics is that total nonfarm payroll employment increased by 321,000 in November, and the unemployment rate was unchanged at 5.8 percent. Job gains were widespread, led by growth in professional and business services, retail trade, health care, and manufacturing. Revisions to the September and October data were a combined +44,000, bringing the 12-month prior average to 224,000. The November monthly increase is massively over the consensus of 238,000 and will continue to bring forward expectations of a US rate rise and add further gains to the US dollar.

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Eurozone Manufacturing PMI


Unfortunately there is more bad news for Mario Draghi this morning with weakness across the major Euro area economies as manufacturing PMI’s slipped to 50.1 from 50.4. Particular worry is that Germany, the Eurozone’s largest economy, registered 49.5, down from 50 previously and a 17-month low. A reading above 50.0 for the index indicates an expansion in activity, while a reading below that level signals a contraction. In this scenario of continued feebleness in economic growth, diminished consumer confidence, and high unemployment, the ECB must deliver on unconventional easing to avoid a Japanese style deflationary spiral.

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Keith Underwood No Comments


Mario Draghi, ECB President, spoke Friday at the Euro Banking Congress in Frankfurt and stated that the bank is ready to “step up the pressure” and expand its stimulus program if inflation does not show signs of quickly returning to the bank’s target. Do not take for granted that when the ECB President speaks, he means it.

Mr. Draghi stated that “If on its current trajectory our policy is not effective enough to achieve this, or further risks to the inflation outlook materialize, we would step up the pressure and broaden even more the channels through which we intervene, by altering accordingly the size, pace and composition of our purchases”.

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September Non-farm payrolls

Friday’s release of the September labor departments non-farm payrolls increase of 248,000 and a drop from 6.1% to 5.9% in the unemployment rate will certainly put the wind back in the sails of US dollar bulls. Strength in the labor market will provide the FED with the confidence to guide US interest rate expectations higher as well as sooner, while the ECB and BOJ ease conditions on their struggling economies. Dollar strength in developed markets, known as G10 currencies, is broad based and gaining momentum as a result.

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