By Klaudius Sobczyk, Managing Director of Advanced Dynamic Asset Management GmbH
Europeans can be proud of themselves. They are well on the way to becoming a second Japan. The European Central Bank continues to talk the situation up and refuses to continue to print money. The German constitutional court is now in charge to decide if bond purchases by the ECB are legal. This could be the best way to restart the European financial crises.
The Bank of Japan, The Fed and the Bank of England continue to print money in an effort to stave off deflation and support economic growth. There is a very positive side-effect to this monetary easing. The currencies weaken. At the same time the Euro can appreciate. You can look at the USD, JPY, AUD, CAD, NZD or numerous EM currencies. The following charts show the USD and AUD as examples. As the world embraces currency wars Europe could be forced to abstain – allowing the Euro to appreciate by default.
EUR/USD weekly chart
EUR/AUD weekly Chart
The movement of the Euro is a forecast of the outcome of the upcoming legal battle. If the German constitutional court curtails the ECB’s ability to purchase government bonds the Euro could continue to strengthen. Other currencies would continue to devalue, in the process supporting global economy and local economies. A strong Euro is a bitter pill for Europe. Countries such Greece, Italy or Spain would need either more monetary stimulus or weaker currency or both to tackle their problems efficiently – and swiftly! A strong Euro is just pushing those countries deeper into recession as productivity gains are slow to materialize. Ultimately the competitive edge brought about through a weaker currency will not be a choice.
The upcoming deliberation this week in the German constitutional court will be very telling about the future ability to resolve crises in Europe. Will the German conservative attitude win, delivering a deep division in Europe? Or will Germany try to accommodate their partners with more unorthodox monetary policy which has been implemented across the world. If Germany wins Europe will suffer but the Euro stands to gain.