Isn't the EU rate being zero a red flag?

Nowler

Experienced member
1,324 146
Hi,

Was just doing a bit of pondering today... looking at the major currencies, and it got me wondering.
Isn't the EU being at 0.0% interest rates a major concern?

We are clearly in a period of global economic slow down, and likely heading into a recession at some point in the near future.
When this happens, the 2 main tools an economy has to navigate through are 1) QE, and 2) Lowering interest rates.

Looking at the USD and CAD, their interest rates are at 2.5 and 1.75 respectively.
With their current level of inflation being 2.0 each.
Neither is struggling with high inflation, and have room to breathe should it increase a bit.

But looking at the EUR, the interest rates are at 0, granted they also have room to breathe should inflation rise when they start printing more money to stimulate their economy.

This puts the likes of the USD, CAD, AUD, NZD in pole position when trading against the EUR when a recession does hit. As each of these have 2 tools to tackle a contracting economy.

Anyone got any thoughts on this?
Am I making any errors in my thinking perhaps?


PS:
Looking at the CHF and the JPY too, they are both currently at negative interest rates. Granted they have more room to breathe in the event of increasing inflation as a result of QE. Wouldn't this make both of them more vulnerable than the EUR in the event of a global recession?
 

NVP

Legendary member
37,504 1,972
see my post on flagging any inappropriate or spamming posts .....
 
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NVP

Legendary member
37,504 1,972
hey N

its all about Relativity dude .....the differentials count not the absolute rates

interest rates fundamentally drive the G8 ........but dont get toooo hung up on them ......theres a lot of other factors as well ....

sure the Euro is kinda at back of line with swissie and yen on rates ....but thats the game .....the Euro represents a rediculous cocktail of economies across some 27 countries .......impossible to police and control

if they need to they can play the game .........print money , reduce rates sub zero (yen , Swissie) ......whatever it takes ....

wouldnt get to into long term strategies predicting such things ..........

i would worry more about the demise of the merkel era and what comes next for the EU ..........the french peacock macron is shaping to become the new voice for europe ..but his French economy cannot back up his ambitions (unlike the german economy)..........and the new German model will be much more internally focused .....

I would be hopeful of Sterling actually making it back a little against Euro in next year or so post brexit ........but its such a bloody mess i think my holiday money will be again short changed in 2020 as usual !

fascinating times

N
 
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NVP

Legendary member
37,504 1,972
if global recession hits then its all about going to the best recessionary currencies

Yen , Swissie are amongst the historic havens in such times ......but can you see the catch already ?

go USD .......best long term bet at moment if it goes tits up .........it will strengthen
 

hatemypips

Established member
603 45
Hi,

Was just doing a bit of pondering today... looking at the major currencies, and it got me wondering.
Isn't the EU being at 0.0% interest rates a major concern?

We are clearly in a period of global economic slow down, and likely heading into a recession at some point in the near future.
When this happens, the 2 main tools an economy has to navigate through are 1) QE, and 2) Lowering interest rates.

Looking at the USD and CAD, their interest rates are at 2.5 and 1.75 respectively.
With their current level of inflation being 2.0 each.
Neither is struggling with high inflation, and have room to breathe should it increase a bit.

But looking at the EUR, the interest rates are at 0, granted they also have room to breathe should inflation rise when they start printing more money to stimulate their economy.

This puts the likes of the USD, CAD, AUD, NZD in pole position when trading against the EUR when a recession does hit. As each of these have 2 tools to tackle a contracting economy.

Anyone got any thoughts on this?
Am I making any errors in my thinking perhaps?


PS:
Looking at the CHF and the JPY too, they are both currently at negative interest rates. Granted they have more room to breathe in the event of increasing inflation as a result of QE. Wouldn't this make both of them more vulnerable than the EUR in the event of a global recession?
You are discussing it in very broad terms of course ability of ECB to affect output by monetary policy is limited because they struggle to hike the rates, same is in Japan. When it comes to response to recession, ECB can also use non-standard policies to combat slowdown like deposit tiering, QE, etc. and it doesn't necessarily mean that US or Canada which have higher rates now will be more effective in fighting recession.
 

NVP

Legendary member
37,504 1,972
theres nothing but "broad" terms, ambiguity and nebulosity for this subject

thats why most economists cant trade .......they are used to never being held accountable for their theorems !

N
 

Nowler

Experienced member
1,324 146
hey N

its all about Relativity dude .....the differentials count not the absolute rates

interest rates fundamentally drive the G8 ........but dont get toooo hung up on them ......theres a lot of other factors as well ....

sure the Euro is kinda at back of line with swissie and yen on rates ....but thats the game .....the Euro represents a rediculous cocktail of economies across some 27 countries .......impossible to police and control

if they need to they can play the game .........print money , reduce rates sub zero (yen , Swissie) ......whatever it takes ....

wouldnt get to into long term strategies predicting such things ..........

i would worry more about the demise of the merkel era and what comes next for the EU ..........the french peacock macron is shaping to become the new voice for europe ..but his French economy cannot back up his ambitions (unlike the german economy)..........and the new German model will be much more internally focused .....

I would be hopeful of Sterling actually making it back a little against Euro in next year or so post brexit ........but its such a bloody mess i think my holiday money will be again short changed in 2020 as usual !

fascinating times

N
Thanks for the reply.
Apologies for my late one... been a bit busy with other things to sit down and think about this properly.

I was considering the relative difference between the likes of the USD and CAD to the likes of the EUR and JPY.
I would have assumed reducing from positive values to positive values would have been better than reducing down into the negative (like JPY/CHF), like the EUR would have to if they were to reduce rates. Obviously, reducing from 0 to negative would still achieve the main goal, which is to make money more easily accessible so as to stimulate the economy in the short-term. But surely charging the banks money to save their cash (negative rates) encourages bad loans (defaulting)?

Granted, I am looking at this from quite a broad view. But that is my intention. I am not going to be placing trades solely on the fact that the USD has higher rates than the EUR... I'm just trying to understand the larger economic picture first, and then zoom in on particular situations/events as they arise.

I agree that I should pay more attention to the whole Merkel aspect (i've heard she's being heavily endorsed to be the future EU Commission Pres.).

My main trading focus lately has been selling the GBP. May was a good trading month for me selling that. Then of course, it got a bit funky in recent weeks but I remained bearish on it, which paid off on Friday. However, I do believe the UK will rise again once this drama is behind us. So I will be looking for opportunities to buy it against the EUR at some point... hopefully they get their act together before the next recession as I reckon it will gain against the EUR then. That analogy of bigger ships (EU... larger stocks) taking longer to turn around comes to mind. Being out of the EU will free up a lot of money for the UK. As you mentioned, "the Euro represents a ridiculous cocktail of economies across some 27 countries .......impossible to police and control".
 

Nowler

Experienced member
1,324 146
You are discussing it in very broad terms of course ability of ECB to affect output by monetary policy is limited because they struggle to hike the rates, same is in Japan. When it comes to response to recession, ECB can also use non-standard policies to combat slowdown like deposit tiering, QE, etc. and it doesn't necessarily mean that US or Canada which have higher rates now will be more effective in fighting recession.
Thanks for the input mate.

It might not be a foregone conclusion that the USD and CAD will be much more effective at navigating the next recession, but surely its more probable?
They have more tools at their disposal.
They can use non-standard policies also cant they?

Of course, this isnt enough to base my trades off of, but it begins to tip the scale of probability.
I would then need to look more closely at each release/indicator of how their economy is doing, and compare it to the other economies.
 

hatemypips

Established member
603 45
Thanks for the input mate.

It might not be a foregone conclusion that the USD and CAD will be much more effective at navigating the next recession, but surely its more probable?
They have more tools at their disposal.
They can use non-standard policies also cant they?

Of course, this isnt enough to base my trades off of, but it begins to tip the scale of probability.
I would then need to look more closely at each release/indicator of how their economy is doing, and compare it to the other economies.
Yes your conjectures are quite reasonable. EU faces deeper slowdown as can be concluded from today's ECB meeting and it's closer than in the US or Canada. Basically Canada has the strongest banking system among developed countries (considered to be spectacular example of prudence and efficiency), while EU banking system is ailing. I guess next recession should be somehow connected with EU banking system or maybe Japan. Low rates don't mean good I mean central bankers are now in uncharted waters.
 

Nowler

Experienced member
1,324 146
Yes your conjectures are quite reasonable. EU faces deeper slowdown as can be concluded from today's ECB meeting and it's closer than in the US or Canada. Basically Canada has the strongest banking system among developed countries (considered to be spectacular example of prudence and efficiency), while EU banking system is ailing. I guess next recession should be somehow connected with EU banking system or maybe Japan. Low rates don't mean good I mean central bankers are now in uncharted waters.
Talking about the EU banking system failing, Deutsche Bank (with a market cap of 16B) are apparently setting up a "Bad Bank" to offload their toxic debt. Somewhere between 30-50B...
Surprised it took them this long to distance themselves from it. On the bright side... their stock is as cheap as chips, so could be worth investing in if they can offload said toxic debt.

It will certainly be interesting to see how the next 6 to 12 months play out. I am actually very excited to see what happens. This will be my first recession as a trader. I am hoping to gain a lot of experience...and to profit from the eventual upturn in the stock market.

But the most important thing right now, is to gain experience.
 

hatemypips

Established member
603 45
Talking about the EU banking system failing, Deutsche Bank (with a market cap of 16B) are apparently setting up a "Bad Bank" to offload their toxic debt. Somewhere between 30-50B...
Surprised it took them this long to distance themselves from it. On the bright side... their stock is as cheap as chips, so could be worth investing in if they can offload said toxic debt.

It will certainly be interesting to see how the next 6 to 12 months play out. I am actually very excited to see what happens. This will be my first recession as a trader. I am hoping to gain a lot of experience...and to profit from the eventual upturn in the stock market.

But the most important thing right now, is to gain experience.
Inflation options price in 50% chance that inflation will stay at 1-1.5% next five years. Add pressure from potential recession on it. It can drop even lower. No chance for ECB to hike rates to improve health of banking system. While low profitability of EU banks is tied with low rates. But rate tiering will boost their returns a little bit if ECB introduces it.

I guess anybody buying bottom in bank stocks will get second bottom as a gift soon :)
 

TWI

Senior member
2,527 252
zero to negative are actually quite good for governments that can now get paid to borrow over the long term and so start to spend to stimulate growth while actually reducing their interest cost. Austerity didn't work too well anywhere so now we try the opposite. EU banks are bust and need refinancing until they get rid of a huge amount of toxic debt off their books, ECB are obliging. As is clear there is also a competitive devaluation of currency going on globally, US is way behind on that one and why the USD has been so consistently strong. Attached comparative 10y yields.
 

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