Dissent at the ECB

The argument for a ‘reign of terror’ by a resurgent US ‘King’ dollar is getting stronger. The latest evidence? Public dissent among members of the European Central Bank (ECB) policy board. Could this signal even more trouble in euroland?

There are twenty-five members on the bank’s governing council, with six on the executive board. One of the six on the executive board is Sabine Lautenschlager. And judging by comments yesterday, she’s had just about enough of ‘stimulus’ via monetary policy.

The bank’s policy board meets in less than two weeks. Yesterday, Lautenschlager said, “I don’t see any reason for further monetary policy measures, especially not for an extension [of the APP]”. The APP is the asset purchase programme. “It buys time but does not heal the structural causes of a slack economic recovery. We should give the numerous and massive monetary policy efforts time to take full effect”, she added.

You could take the news either way as a trader

That’s what makes markets so difficult. Everyone expects a more ambitious asset purchase programme, or even further negative interest rates from ECB. That ought to mean a weaker euro, especially in the face of a stronger US dollar. But here comes another German arguing for fiscal prudence, unwilling to weaken the currency beyond what’s already been done.

One thing is for sure: a coherent investment strategy for 2016 had better take into account currency wars and capital flows driven by diverging interest rates. Charlie Morris and I talked about this at lunch yesterday. More from him later this week (after his MoneyWeek cover story on Brexit goes to press).

Category: Central Banks