Monday, June 16, 2008
It's not often that developments in the political sphere bring a smile to Macro Man's face, but he has to admit that he enjoyed the spectacle of Ireland's rejection of the Lisbon Treaty, which was announced on Friday. Not necessarily because the Treaty is a bad idea; like 99.9999% of other European residents, he's not read the full 277 page document, and so is not able to pass an informed judgement.
But that's just the point; the European political elite has, in every country but Ireland, chosen to jam the Treaty (which fundamentally changes the political structure of the EU) through without a public vote. The Irish, who enjoy the constitutional right to referenda on such matters, answered the call of democracy and rejected the treaty- not necessarily because it was a good idea, but because they could. The rejection has prompted a hail of criticism from the euro elites, prominent among whom is Luxembourg's prime minister Jean-Claude Juncker. In what can only be described as a stunning coincidence, Juncker was in line to fill one of the powerful roles created by the Treaty.
All of which is perhaps a reminder that Europe is as bloated, corrupt, and sclerotic as it was in 2000-2001, when the euro was pummeled in a crisis of confidence. However, the loss of stature of the US, both in terms of its political leadership and its financial markets, has perhaps obscured the warts on the European project for the past few years. Nevertheless, with a change in political leadership around the corner in the United States, might longer term investors take stock of their positions and begin to close some long-standing dollar shorts?
Maybe. What does seem clear is that EUR/USD is approaching some pretty key technical levels, a break of which could spur a nice dollar rally.
However, it's probably premature to get too excited about buying dollars. Last weekend's G8 meeting whiffed in terms of being remotely relevant, and the market is still pricing some pretty punchy expectations for Fed tightening. Some commentators have suggested that if there were going to be a US recession, it would be here already.
Who's to say it isn't? The labour market has deteriorated to a degree that is typically only observed in recessions. Sure, the last unemployment reading may have been distorted by odd factors....but does anyone not think that the birth/death model isn't artificially inflating monthly payroll figures. And sure, recent retail sales figures were better than expected, reading a "whopping" 2.5% y/y gain. Of course, if we deflate it by the CPI (yeah, yeah, I know, there are different things in each basket), we get a comfortably negative volume reading...which we haven;t seen since...er...the aftermath of the last recession.
So for now, Macro Man is content to leave EUR/USD to the mercantilists, spivs, and masochists. Now if only those guys would lave equity markets alone, perhaps there'd be some money to be made this summer!