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Is Super Mario the guy to start the printing machine?

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Is Super Mario the guy to start the printing machine?

Postby Eurusd Trader » Sat Nov 05, 2011 9:31 am

You might not think so now – watching the European events over the last 21 months – but should Europe succeed in solving debt issues to the level of market confidence – we will be talking about a EURUSD at 1.50 or so.

I don’t talk about the level after a good “risk on” week – I talk about the level when EU debt issues are off the wires – gone.

Who benefits from Euro as strong as that level in Europe? - No one. Europe has export driven economies – to a much greater extent than the US – and European countries will suffer from a stronger Euro. The one to suffer most is likely Germany.

In his first press conference – after having announced the first rate cut for some time – Mario Draghi gave an outlook for inflation which triggered a thought on my part.

The immediate was the thought of another rate cut coming – and quite soon.

The other one – on reflection – was whether Mr. Draghi would advocate the interpretation of the same policy tools as those used by the Federal Reserve through two quantitative easing programs during 2009 and 2010.

The mandate of the ECB would likely have to be changed – and definitively it would mean a policy change.

But think about it? It would mean a much more active ECB in the role as purchaser of sovereign debt and it would be purchases paid with newly printed Euros.

It would cause the same effect for Euro as that seen for USD throughout QE1 and QE2 when the USD fell significantly. This time it would be the Euro.

Why would the ECB do this and why is Mr. Draghi possibly the person to advocate this?

He comes from one of those countries for which active purchases of their debt would be of great help. He might be encouraged to do this from the inflation outlook for Europe. The bigger export economies – like the German –might get concerns about the strength of the Euro – having managed to get the markets’ attention away from European debt problems.

It is an early call – and likely far too early. But watch the steps as follows:

1) Europe find a way to handle the debt issues which the markets believe in
2) Euro surges to uncomfortably high levels – seen from exporters’ perspective
3) European inflation falls – as do short term interest rates

The three criteria needed for provide easing, further purchases of debt – and – printing Euros.

And – likely the only way to weaken EURUSD – by the time European debt issues are of little concern to markets anymore.
Eurusd Trader
 
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