Dollar set to remain the reference currency for a long time yet

In a recent opinion piece, the German foreign minister Heiko Maas discussed how Europe needs to reassess its partnership with the United States, stating that the two areas have been drifting apart, requiring them to reshape their relationship in light of recent changes, and calling for an assertion of Europe’s autonomy in diplomatic, military and financial terms.

German Chancellor Angela Merkel disputed this point of view, refuting this notion of drifting apart, which she believes would damage the very long-standing relationship between Germany and the US, which acted as the foundations for North Atlantic relations. It would also require greater political integration within Europe, which is not the direction Germany wants to take, opting instead for a sort of federal approach without a federal government, but with strict rules for each State. This sits in contrast with French president Emmanuel Macron’s aim and the idea of a substantial European budget to influence the pace of European construction.

Heiko Maas also raised the issue of dependence on the dollar Continue reading

Angela Merkel’s Smart Move

According to the German newspaper Handelsblatt, Jens Weidmann, the current president of the German Bundesbank, will not be Merkel’s candidate at the head of the ECB in October 2019. Mario Draghi will leave the ECB presidency at this date.
This can be surprising but it is not. It’s the most rational decision for Germany.
The ECB strategy is often looked through the lens of the Bundesbank. We are all attentive to the German point of view. The German central bank is perceived as ultra orthodox on monetary policy and Germany is the largest and the most powerful country of the Eurozone. These two reasons suggest that there is no need of a German president. The Bundesbank president and the accumulated credibility of the Bundesbank are sufficient to condition the ECB’ s behavior. A German president would be redundant.
Germany can therefore choose a German candidate for another job at the top of an other European Institution and extend its influence.
Well done Angela

Venezuela: The crisis is far from being over

Venezuela is in crisis. Its economic activity is collapsing, its inflation rate is skyrocketing and the value of its currency is falling like a stone. People are leaving the country as soon as possible as they perceive that there is no future.
People are starving. The average weight of the population is lower year after year. According to a Survey on Living Conditions (ENCOVI), the average weight of the Venezuelans was 11 kilos lower in 2017 than in 2016 and in 2016, 8 kilos lower than in 2015. That’s a real measure of a deep crisis. According to this survey, in 2014, people out of poverty represented 51.8% of the population. In 2017 it was just 13%. In other words, 87 % of the population was considered as poor.
When the oil price is high, as it was the case before mid-2014, the situation is manageable but as soon as it falls there are no capacities to create new revenues.
politicalbackgroundVenezueal.png

The real GDP level is now 40% lower than in 2015 and the inflation rate has an hyper-inflation profile. The cup of coffee with milk, reported by Bloomberg, shows how prices are slipping. The inflation rate is already forecast at 1 000 000% this year. Continue reading

The UK low productivity momentum: the real issue

John van Reenen, a professor of economics at the Massachusets Institute of Technology, said if the UK could not boost productivity growth, wages would not increase, tax receipts would not rise and austerity would continue. “Not very nice,” he added.

Read here the FT article https://www.ft.com/content/32ba93b0-8dcf-11e8-bb8f-a6a2f7bca546

Turkey – On the way to a persistent crisis

The sell-off on the Turkish lira continues. The exchange rate against the dollar was above seven (7.2 in Asia) last night, it it now at 6.85 (just before 0400 pm, Paris time today) while it was at just 5.15 a week ago.
The graph is impressive and shows that the situation has dramatically changed in recent days.
turkishlira1.png
On Turkey there are many things to look at to understand the recent weakness.
1 – In many other emerging countries, the situation has changed in April when the US dollar went up as expectations on the Fed’s monetary policy changed. Emerging currencies became weaker.
2 – The direct consequence was capital outflows from emerging to the US and lower liquidity on fixed income markets. In many emerging countries interest rates, short and long, went up rapidly. I have written on this topic here and here.
3 – The story stopped there in many countries notably in Asia. The situation is less comfortable but manageable. For countries with deficit in the current account and large indebtedness in dollar the situation went worse. This was notably the case for Turkey but also for other countries like Argentina or Indonesia. I have written on Turkey here and here

In other words, the Turkish lira weakness seen after mid-April was just the result of a stronger dollar leading to an emerging crisis. The specific Turkish momentum came from large disequilibria (current account and dollar indebtedness) that reflect the economic policy of recent years.
The recent exchange rate profile came after tensions with the US but the currency was already weak for reasons explained above. Tensions have created a run, leading to a rapid depreciation. Continue reading