One of the key dates for 2014, at least in my opinion, was June 11, when the ECB
introduced, for the first time in its existence, a negative deposit facility interest rate of 0.10 percent.
For investors, it could be still helpful to remember the fact that only a couple of days later we started seeing, as observed in New York, sustained inflows into the dollar and outflows out of the euro really accelerating.
Also very interesting at that time, on June 13th, ended a 5-month rally in West Texas Intermediate crude oil (WTI), also known as Texas light sweet, which started on January 9 at $91.24 per barrel (bbl) and topped at $107.68/bbl (rise of 18 percent), which price since then has been on a downward path and on Monday closed at $75.45/bbl (decline of about 30 percent) in New York.
Now, when on September 10 the ECB
decreased for a second time its interest rate on its deposit facility by 10 basis points to -0.20 percent, we observed an intensification of as well as the positive inflows into the dollar as of the outflows out of the euro, for the calming down a little bit in late October.
Maybe this could sound a little bit strange to many investors, but to me it cannot be excluded from logic thinking that one of the consequences (unintended of course) of the negative ECB interest rates on its deposit facility has helped the ECB to export part of the eurozone’s disinflationary pressures to many parts in the world.
When we continue in this context of thinking and look at the flows of “real” money as observed during the month of November in New York, it should come to nobody as a surprise that when on November 6 ECB President Mario Draghi declared the ECB governing council was “unanimous” in its commitment to using additional, unconventional measures if needed and that ECB staff had been instructed to contemplate further measures we observed another surge of inflows into the dollar and outflows out of the euro.
All this became really interesting when intensity of these opposite dollar/euro flows started to diminish when many started to ask themselves “when” all these promises of Mr. Draghi will finally become acts/deeds and also, on the other side of the pond, “when” the Federal Open Market Committee (FOMC) will finally start hiking rates somewhere in 2015 or even 2016.
Also, and this is important for investors, one day after the ECB's second hike of its negative deposit rate, on November 7 we got the low point for the gold price at $1,130.40 per ounce of gold, and since then the price has rallied by about 6 percent in dollar terms.
When we put all what’s mentioned here before together, I don’t think it’s an overstatement to say we can observe a certain relation pattern that has recently developed between: firstly the ECB policy; secondly the dollar flows as observed in New York and thirdly the performance of a selected commodities like the gold, oil, etc.
So, an intriguing question that arises is among others what was the “covered” message ECB President Mr. Draghi wanted to communicate in his speech in Frankfurt, Germany at the European Banking Congress
Notwithstanding everything remains, as always, open to debate, to me it became crystal clear he is preparing massive buying of “something” when he gave the rationale for doing so by saying: “…But a channel I particularly want to focus on is the risk that a too prolonged period of low inflation becomes embedded in inflation expectations. The firm anchoring of inflation expectations is critical under any circumstances, as it ensures that temporary movements in inflation do not feed into wages and prices and hence become permanent. But it is even more critical in the circumstances we face today…”
In the mean time we still don’t know precisely what he’s going to buy, but it becomes clearer by the day the ECB is preparing to ignite at some time during the first half of 2015 its own concept of quantitative easing (QE) and whatever form that takes I have no doubt in my mind we’ll see because of that more inflows into the dollar and outflows out of the euro, which probably would impact commodities like gold, but also oil and their prices should move on a in a likewise path as we have been able to observe since the beginning of June this year.
When we add to all that: firstly the growing concerns the Chinese economy is slowing too quickly and secondly we take that alongside the fact Saudi Arabia doesn’t seem to be concerned about the current state of the oil prices. Saudi Arabia's Oil Minister Ali al-Naimi just said when asked if he thought this week’s OPEC meeting might be difficult: “No — why?” And when asked what he thought about the 30 percent oil price decline he said: “It goes up and it goes down. This is not the first time the market is oversupplied.”
And when asked to comment on the state of the oil market his answer was: “Aren’t there enough comments already?” we could be prone for an acceleration of commodities’ price moves as we’ve seen since June 11.
The OPEC meeting will be without any doubt one of the most important of the last several years. If the decision on cutting oil production or not will have a lasting impact on where oil prices could go from here on remains an open question. In my opinion it will not, certainly not in the foreseeable future and as long as there is not a geopolitical event that pops up from nowhere.
Please take care, if the whole scenario as described here before were to occur, which I think it will, then there is no doubt that, among a lot of other things, these price moves in commodities will take their toll on the commodity currencies who over the last couple of weeks have been performing relatively well.
In my opinion, investors should keep a close eye on all this because when things really start to move it probably will go rather fast.
And if so, if all that happens we will be "permitted" to say Mr. Draghi has exported, at least in part, the current eurozone’s deflationary pressures. How the FOMC will take that into account, remains an open question.
Finally, the OECD just released its latest Economic Outlook wherein its states: “The Economic Outlook draws attention to a global economy stuck in low gear, with growth in trade and investment under-performing historic averages and diverging demand patterns across countries and regions, both in advanced and emerging economies … We are far from being on the road to a healthy recovery. There is a growing risk of stagnation in the eurozone that could have impacts worldwide, while Japan has fallen into a technical recession … Furthermore, diverging monetary policies could lead to greater financial volatility for emerging economies, many of which have accumulated high levels of debt (dollar denominated!) … activity is gaining strength in the United States, which is projected to grow by 2.2% in 2014 and around 3% in 2015 and 2016…”
So, as an investor to play it all relatively safe, I’d keep my investment preferences for the major part concentrated on the U.S. dollar as currency and in commodities on gold, which are both extremely liquid investment vehicles you can sell whenever you want and without limits.
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