Morning Commentary: Family Dynamics

Foreign Exchange - Morning Commentary
Family Dynamics 
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
Last week, the German Constitutional Court (GCC) delivered its ruling on the RCB’s Public Sector Purchase Program (PSPP).  In its ruling, the GCC expressed concern that the ECB overstepped its monetary policy mandate and requested that the ECB respond, within 3 months, and show that the PSPP is “not disproportionate.”  

This development clearly adds additional fuel to the European instability fire.  The most immediate threat from the GCC ruling would be the German central bank’s inability to participate in the PSPP program after the given 3 month window.  However, other central banks could pick up this slack.  The greater concern is the relationship between EU institutions and national constitutional courts (versus the European Court of Justice).    

Per EU treaties, the ECB is independent and does not answer to national courts.  This point was made clear when European Commission (EC) President Ursula von der Leyen emphasized that “the final word on EU law is always spoken in Luxembourg. Nowhere else.”   

This means that the ECB doesn’t need to respond to the GCC.  However, not answering would create issues at a time when Germany is taking over the EU Presidency and the EU needs a unified response to COVID-19—i.e. the European Recovery Fund.  Conversely, should the ECB respond, it opens up any EU institution to second guessing by any national institution, a less than ideal situation.    

This puts the ECB in the position of needing to respond without responding.  As silly as this problem sounds, the ECB can do this.  If the ECB addresses the monetary policy rationale of its PSPP program—through its strategic review and without direct reference to the GCC—the German parliament could conclude that the GCC’s questions have been answered.  Unfortunately this workaround, or another similar maneuver to solve the current conflict, does not eliminate the risk of another national court challenging ECB policy, leaving future ECB policy much more uncertain.  
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
  • In past commentaries we touched on the difficulties in re-opening economies without a second wave of infections.  This “two steps forward, one step back” dynamic was reflected in a flare up in South Korea yesterday and new cases in Wuhan, China today.  China has announced that it will test the entire 11 million population of Wuhan after it experienced its first new coronavirus case since its lockdown ended.  Expect a similar dynamic of “stops and starts” in other countries as they re-open.  
  • US-China tensions also ebbed and flowed overnight.  On the positive side, China is ramping up its purchase of US soybeans.  However, the US did move to block a government pension fund from investing in China.  Elsewhere, China-Australia tensions flared with China suspending beef imports from Australia as the Australian government called for an investigation into the handling and origin of the coronavirus.  The AUD initially sold off sharply but has since recovered.  Likely the markets are looking through these moves as saber rattling.  China tends to single out a single tier entity to attack and send a message while leaving the primary target alone, i.e. attack Australia while leaving the US alone.        
  • The Fed pushed back against the notion of negative interest rates.  Fed fund futures now show Fed funds above zero through 2020 after previously showing Fed funds negative by the end of 2020.  
  • The UK may extend its wage program through September.  This announcement comes amid confusion on the UK’s re-opening plan as PM Johnson appears to be walking back some of the re-opening moves announced Sunday.   
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