Wednesday, May 14, 2014

Gary Shilling says Time to short Euro

The European Central Bank is gearing up to depress the euro, which it blames for much of the deflation threat in the euro area, or at least the portion it can influence.

The ECB reduced its overnight reference interest rate from 0.5 percent to 0.25 percent in November. If it cut the rate again, the ECB would join the Federal Reserve and the Bank of Japan with rates of essentially zero. 

With all the central-bank-created liquidity sloshing around the world, these rates are largely symbolic. Yet another ECB reduction could make foreign investment in the euro area less attractive, to the detriment of the euro.

Currently, ECB member banks are paid nothing on their deposits. A negative rate -- charging banks to leave their money at the central bank -- would encourage them to lend and invest elsewhere. That would push down returns in the euro area and discourage foreign investors, also to the detriment of the euro. 

Looming deflation is pushing the ECB rapidly toward measures aimed at depressing the euro as well as stimulating euro-area economies. The time to be short the euro against the dollar may finally have arrived.

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