Not content with the traction he got from a WSJ article (see below), Boston Fed President Rosengren repeated his dovish demand for unlimited QE yesterday, and this time the markets seemed to pay attention. Although the US economy is not there yet, should it slide back towards recession either later this year or in 2013, both investors and traders took heart from the fact that at least one Fed official is prepared to countenance all-night money printing if that becomes necessary. Together with growing calls from various commentators here in Europe for the ECB to do the same, it was no surprise to see equities head higher once again, while safe-haven currencies such as the dollar and the Japanese yen were on the defensive. The better mood was aided by some respectable earnings reports out of both Europe and the US. The S&P climbed through 1,400 to reach its highest level since early April.
Some positive euro price action. Notwithstanding the increasingly trenchant rhetoric of some of Europe’s major policy officials of late, the more positive price action evident in the single currency recently is noteworthy. Two weeks back, the euro looked poised to fall below 1.20 for the first time in two years; indeed, a test of the low recorded in July 2010 of 1.1877 seemed inevitable. However, the euro has bounced back, and over the last couple of days has regularly traded above 1.24. Not even yesterday’s poor economic news seemed to trouble the single currency. In Germany, factory orders retreated by almost 8% in the year ended June, while Italian industrial production fell by a similar 8% over the same time period. For now at least, the euro seems comfortable around the 1.24 level. In terms of both relative strength and momentum, it is just possible that the EUR may surprise and head higher in the short term. The 100-day moving average comes in around 1.2725 – if the euro does continue upward then this looms as a potential target.
Rosengren – the arch Fed dove. Although not currently a voting member of the FOMC, the views of Eric Rosengren, Boston Fed President, still carry some weight. In a WSJ article, Rosengren argued that the Fed should commence an open-ended program of bond-buying, because its current stance continues to fail to meet either aspect of its mandate, namely sustainable growth and price stability. Rosengren contended that the program should remain in force until these objectives are satisfied, and that the bond-buying ought to include mortgage-backed securities. The policy prescription of Rosengren is at one extreme and will no doubt be tempered by the moderate views of other Fed officials. If the Fed were to travel down this path of unlimited QE, then it would have significant (negative) ramifications for the dollar. It would also incur the wrath of international policy-makers and investors. For now, Rosengren’s dovish disposition stands little chance of being adopted but if it comes to pass that the economy falls back into recession either later this year or early next year because of fiscal strangulation, then no doubt Fed Chairman Bernanke will consider such an approach.
Germany’s SPD endorses eurobonds. In a potentially important shift in the policy debate raging around Europe regarding how to respond to the sovereign debt crisis, the opposition SPD (Social Democratic Party) has intimated that it is prepared to endorse eurobonds. Under the condition that any change in the German constitution is first ratified by a referendum, the SPD has thrown its support behind jointly-guaranteed eurozone bonds provided that a fiscal union is agreed by all nations. In the announcement of its revised policy, the SPD spokesman warned that the euro would not survive without common financial and tax policies. How many times have we heard that over the past few days!