Macro Digest: Is Draghi heading back to Italy?

ECB: I will let other discuss the mechanics of Draghi's speech but I want to elaborate on what I think is / could be happening behind the headlines in ECB and with Draghi.

The last few days I have heard more and more rumors that Draghi could on his way home to Italy as President back stopping Renzi's reform program. Of course, at first I refused, but let's go through the rationale here:

1.) Draghi and the ECB at the end of their cycle.

 

Even Draghi acknowledged today that ECB is now at zero - Not heading to zero bound. In other words ECB now needs the politicians to step and force reforms which make banks lend and consumers consume. The ECB have reached zero not only in interest rates, but also in ability to do more - An ECB with Weidmann could mean 1.2900/1.3000 becomes the low.

 

Furthermore if this is truly the end of ECB and Draghi in terms of "doing something" – then the real question is…….Where does Bunds go? Up or down?  Down – most likely it will be a focus on reforms and being productive over investment in money.

My weaker US Dollar call is slightly artificial as what I am REALLY saying is: US Yield will fall more than German (European rates) from here… US 10 Y vs. G7 is at mean-reversion high of 80 BPS!!!  It's more a fixed income call AND I my biggest 2014 bet remains the same: New ALL TIME low in yields is coming – and the low will be Q1/Q2 in 2015. The short US Dollar Index positions is out of the money by 1%  and of course I need stop loss, but I am long term.

2.) Who is better to fight the political pretend-and-extend modus operandi in European capitals - Draghi or Weidmann? Who has Germany's full support?

 

We are deep into 9^th inning on monetary policy responses  - IF – and it's a big if, the above is going to happen, this could be the big MANDATE-FOR-CHANGE just about every single piece from me have talked about in the last two years. Changes happens when there are no alternatives – I don't see how ECB can do more from here……

 

My italian colleague Gian Paolo Bazzani, CEO of  Saxo Italy, makes an excellent case: "Since 2012 and up to Napolitano re-election we have had rumors about this role for Super Mario. The most recent hypothesis is that Napolitano could resign after reforms (which ones???) and Draghi already talks as a politician:  "It 's time to give up sovereignty over the reforms. Italy rejects investments" (August 7^th)

 

As a bare minium – "insure" your short EURUSD with some EUR calls – a one month 1.3205 is only 25 ticks.

 

Steen

 

Med venlig hilsen  |  Best regards
Steen Jakobsen  |  Chief Investment Officer

 

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