Morning Commentary: A Leopard Can’t Change its Spots

Foreign Exchange - Morning Commentary
A Leopard Can’t Change its Spots
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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
Our title’s idiom implies that people cannot change who they are (their true character), no matter how hard they try. ECB President Mario Draghi and the ECB have thrown everything but the kitchen sink at the EZ economy to generate stronger growth since the Great Recession. QE and negative interest rates have been in play now for multiple years, and yet, the EZ economy has produced less than desired results. Most recently with the U.S. imposing trade tariffs on China, EZ economies have suffered as Chinese demand has weakened for global imports and EZ exports have fallen sharply. Many economies in the EZ depend on nearly 35% of their GDP on exports…the U.S. figure is near 12% so they are at greater risk.
Today’s ECB meeting and the post-meeting comments from Mario Draghi should not be a surprise as his basic DNA is dovish and he has reacted to a multi-month series of weak economic data showing Italy in recession and Germany barely escaping one. ECB President Mario Draghi downgraded 2019 growth sharply from 1.7% to 1.1% and lowered inflation expectations for 2019 from 1.6% to 1.2%. He also downgraded GDP and inflation expectations for 2020. EZ interest rates are lower and the euro is weaker.
Why is all this important? Because a continuing weakening EZ economy combined with a weakening Chinese economy raises concerns about the future growth rate of the U.S. economy as global supply chains are all interconnected. It also potentially keeps the Fed on hold for a longer period of time; U.S. interest rates are lower today in sympathy with the lower EZ interest rates. The U.S. dollar (DXY) is higher today and is up for the sixth day in the past seven. Tomorrow’s U.S. and Canadian jobs reports will be important barometers for their respective economies.
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