US bond yields tumbled after the Labor Department released its weekly unemployment claims report. That’s usually a non-event: weekly claims are a noisy number affected by any number of extraneous factors, in this case Hurricane Harvey. But this one was a real outlier: the 298,000 claims number (vs. an expected 245,000) was a five standard deviation event, the biggest blip on the radar screen since the recovery from the Global Financial Crash began.
Bond yields already were falling overnight as the euro jumped to its highest level in three years, as investors positioned for the European Central Bank’s meeting earlier today. Asia Unhedged has been warning for weeks that the euro has a great deal further to rise. Germany’s financial system depends on savings and bank loans, and savers now get a negative 0.5% nominal yield with 1.5% inflation, or a 2% negative real yield. That can’t go on, and the long-suffering German monetary authorities will restore positive interest rates some time in 2018. That means the euro has to go up. The only question is when.
It costs money to short dollars (with a positive yield) and buy euros (with a negative yield), and speculators have to choose between a money-losing position in the short-term and missing the big move in the medium term. That’s why the euro jumped before the ECB meeting. Few people thought that outgoing ECB President Mario Draghi would take any measures of importance, but in the case that anything happened, it could only push the euro up.
The Fed is now dominated by doves, after the departure of the most influential inflation hawk on the Federal Open Market Committee, Stanley Fischer. The US economy faces a set of risks, including the likelihood that President Trump will fail to create a coalition to pass his tax cut legislation. So the euro is headed upwards.
Asia Unhedged hears from German sources that EUR 1.25 to the dollar wouldn’t be a problem, but that an overshoot to 1.40 might trigger a new set of financial problems in Europe’s periphery. Count on the ECB to try to talk the euro down from time to time. So the best trading strategy is to buy on dips.