You are on page 1of 2



To contact FX CONCEPTS New York: 1 (212) 554-6830; London: +44 20 7213 9600; Singapore: (65) 67352898;

Alexander Hamilton Draghi
By John R Taylor, Jr.
Chief Investment Officer
Here we are again. The financial world is collectively on the edge of its chair waiting to
see what Mario Draghi is going to do at the ECB meeting next Thursday, June 5. The
enthusiasm already generated by nothing more than his promise that something would
be done is more impressive than the public reaction to the European elections last week;
they might as well have occurred with a news blackout. Thank God for the Euro-sceptics
or we would not have found the results in the papers. A joke: the pollster asks which man
do you like for the Presidency of the EU. Punchline: There is one? Despite a
bureaucracy of hundreds of thousands in Bruxelles and other cities, the executive
branch of the EU is nothing but a gigantic homogenizer of the ideas of the nation states
with almost no face of its own. The only standout personalities working for the core of
Europe are the six at the ECB and among them Mario Draghi stands very tall; everyone
else grabbing the newspaper headlines and TV minutes works for the nation states. The
EU ranks a poor after-thought in the evening news. The only thing people know is how
EU regulations have overruled local regulations. Although this is a positive, the EU is
judged, as it always has been, by its local effectiveness. Is it helping my standard of
living or am I safer with its rules? Europe is judged almost solely on performance from
each individuals point of view. There is no European team. The famous Europeans are
long dead: Jean Monnet, Robert Schumann, and Paul-Henri Spaak. Today, Europes
leaders are often selected from minor countries, a balancing act among the more
powerful states which gives those leaders less power. Herman van Rompuy, the
unknown President in the joke is a good example. He is from Belgium. Mario Draghi is
the face of Europe, even if he only works for the ECB. His previous results and his
personality have helped him and the total power vacuum has assured his prominence.

Looking back at the creation of the United States out of a cacophony of states, which
actually were far more uniform than todays European ones, one critical economic event
had to occur to give the fledgling country a chance: the consolidation of financial risk.
One man did that job: Alexander Hamilton. He was a one-man wrecking crew, but he
had something Draghi does not have, the support of President George Washington, the
man who could have been Emperor. Draghi is alone, he has no mentor, but none can
pull him down either. Hamilton had to deal with Thomas Jefferson, famous and powerful
in his own right, leading the richest, most solvent, most powerful state who felt strongly
that Virginias credit could never be tied to the weaker (all 12 others) states. Hamiltons
trick, moving the nations capital to Washington, cutting Jeffersons commute and
building a new city with its growth potential, was an 18th century solution. Draghi has to
find a 21st century one.

The event next week is not the answer, but it could be the first part of one. Our forecast
is for a baby step and the world will be disappointed. They probably are right. The euro
needs to go down, but not because the peripherals are falling apart, but because the
ECB has willed it. Draghi knows he needs that weakness but he doesnt have enough
power to achieve it. However, just starting with the Bundesbank on his side Jefferson
institutionalized is enough to set off a global risk-on rally into late August. The ECB is
loosening! Unfortunately, its not enough to help the Eurozone. But that is Draghis
opening Germany is headed into a recession, and by next year GDP growth will be
negative. Merkel and friends the would-be Emperors will be without clothes. Then
Draghi can do a Hamilton.
To contact FX CONCEPTS New York: 1 (212) 554-6830; London: +44 20 7213 9600; Singapore: (65) 67352898;

CURRENCY Asia Long-Term View

Buongiorno QE (or some version), Sayonara QE
By Joseph Palmisano
What you do may be more
important than when you
do it, but not always, and
timing definitely does
matter. As we wait for the
ECB to do something,
anything, and the Bank of
Japan to do more, it seems
important to put the
possible moves into
context. As we mentioned
in our Market Insight
Report, Alexander Hamilton
Draghi, the ECB will only
take baby steps and
underwhelm the markets,
which have aggressively
priced in an outcome of
aggressive easing by
taking the EUR/USD down
more than four big figures in three weeks.

As for Japan, when Shinzo Abe won the LDP leadership contest in September 2012 and became
the clear front-runner for the upcoming elections, the financial markets started to react to his plan
(now known as Abenomics) to harness fiscal and monetary reform, along with structural reform, in
order to break free from deflation. Perhaps the most successful part of the plan was to weaken
the yen and get inflation higher and this worked very quickly. But this is coming to an end. The
rhetoric from Kuroda and commentary from the Bank of Japan does not suggest qualitative and
quantitative easing (QQE) is on the cards any time soon. The central bank appears to be very
comfortable with the impact that QQE has had so far, noting that growth is well above trend, the
output gap has likely closed in its estimation, and the Japanese definition of core inflation is likely
to reach the 2% price stability target by the middle of the forecasting period, roughly October
2015. We think this is a mistake. If the BoJ does not announce easing in July, it would remove
the near-term Japan-specific kicker to USD/JPY moving higher. By continuing to do nothing, the
BoJ risks reversing the positive jolt USD/JPY received when Abe first arrived. Thats why we are
bearish on the USD/JPY there is a lot more downside to come and our cycles confirm it. The
USD/JPY will get support if and when the US yield curve starts to price in higher yields. If we get
into a Fed tightening cycle while the BoJ is still in a ZIRP/QE regime, USD/JPY will rise
significantly. But that is not our view. In fact, we look for US yields to fall much further in the
months ahead. You have a better chance of waiting for Godot.

If the ECB hits only a single rather than the homerun the markets want then the EUR will turn
higher, and our cycles tell us this strength can persist for a month or longer. The current
strength in the USD/JPY is on borrowed time. We look for a peak by late next week and
the 102.40 to 102.80 area should hold; if approached we strongly suggest getting short.
The currency pair will then turn lower into the second half of June for an initial low of 101.50, and
it could drop to 100.40 as well. The longer-term cycles call for an important cyclical low in the
middle of August. Our minimum objective is the 100.40 area and the dollar could go much lower.
A close above 102.80 will get us concerned that we are wrong.