sections

Tuesday, 12 December 2017

On currency wars, trouble in Oz and a John DeLorean moment

  • Print
  • Share
  • Save

Related images

  • Nachum Kaplan, IFR Asia Pacific Bureau Chief

Anthony Peters, Swiss Invest Strategist

Anthony Peters, Swiss Invest Strategist

While driving to work this morning I was thinking of John Z DeLorean, automotive genius, automotive fool and convicted drug dealer, remembered mainly for the DeLorean Special, possibly one of the worst conceived cars ever offered to the public but much loved by fans of Back To The Future.

Many suggest that the Doctor’s upgraded version in the film was the only one that ever worked properly. DeLorean wrote a wonderful book about his time at GM called: “On a Clear Day you can see General Motors”. I was wondering what we might see on a clear day? At the moment we most definitely are stuck treading water while trying to peer through the fog of war and that fog became thicker yesterday when the Swiss National Bank threw down the gauntlet by effectively pegging the franc to the euro.

The massive response of Swiss stocks to the move spoke volumes where the CAC and the Dax were each down more than 1% but the SMI rose 4.36%. The surprise at the move appeared to be total, even to the ECB, but I understand that Jim O’Neil of Goldman Sachs had suggested during the weekend such a move might be possible. Now they are all coming out of the woodwork suggesting Bank of Japan might make a similar undertaking and before you know what is happening we will be in an all-out currency war. Missing in the equation is of course Australia which has enormous problems with its currency.

Difficulties Down Under

I was talking to an Oz friend yesterday who reminded me of just how difficult things are Down Under, given the asymmetric nature of the economy. We are all focusing on the commodity side of Australia which is, in one way or the other, on fire and which has pushed the Aussie dollar from US$0.65 to US$1.10 in less than three years. However, on the other side of the equation, everything which is not commodity related is getting killed.

Think of agriculture – we all know about the Australians and their sheep – or, in a case my chum related to me, the content of Australian steel used by the mining industry has in that period dropped from 80% to 15%. His son-in-law has given up his sports retailing business in a beautiful location in that sports mad country and is now in the outback making a seriously good living on a drilling rig. Australia might be the “lucky country” but unless you are in anything other than the commodity game you need more than just luck to survive. If the safe-haven currencies begin to balk at being nothing but that, then the likes of the Aussie and the Kiwi will have to find a way out, lest they become the last resort for fleeing funds. No surprise then that the Reserve Bank of Australia left rates unchanged at 4.75% but it clearly noted the difficulties in other parts of the economy as it left the door open to ease again in the future. Being a success brings nearly as many problems as being a failure.

Re SNB’s move: ’Now they are all coming out of the woodwork suggesting Bank of Japan might make a similar undertaking’

On the subject of the fog of war, the German Federal Constitutional Court is today set to hand down its ruling on the constitutionality of pretty much everything to do with the eurozone bail-outs. The original filings by a clutch of academics under the leadership of Karl Albrecht Schachtschneider go back to challenging the Maastricht Treaty, the adoption of the euro and the Treaty of Lisbon. Again and again the filings deal with the question as to whether the Bundestag has the authority to cede sovereignty to a bunch of foreigners. So far all claims have failed and no doubts the one today which challenges the bail-out packages will end up on the skids.

However, political correctness has in the past prevented anyone in Germany from straying from euro-orthodoxy but we now find ourselves in a period when anything other than a complete dismissal of the case might have become possible. The probable outcome is that the court will vindicate past decisions but set tighter parameters for future behaviour by the government. Greece II will of course slip through the net but it will be made clear that, going forward, Germany should not be treated by all and sundry as a bottomless pit of bail-out money, irrespective of who happens to be in government.

Germany should not be treated by all and sundry as a bottomless pit of bail-out money

Will a court decision in Germany clear some of the fog? Unlikely, as the main subject of the problem, Greece, is still showing no notable signs of making progress towards the targets and objectives it has been set and to which it faithfully promised to adhere. I stick with the view which I have held despite everything since May last year, namely that Greece will have to default. The elephant is still in the room but the constitutional court which is located in provincial Karlsruhe in the south-west of the country is unlikely to hand us the loaded gun to shoot it with.                           

  • Print
  • Share
  • Save