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Has the monetary bazooka of the ECB finally backfired?

A surprise rate cut by the Reserve Bank of New Zealand (RBNZ), yuan reassurances from the Chinese Politburo, an imminent Fed monetary conclave and a post Union Budget bank capital lollipop from the Reserve Bank of India (RBI) all created money making opportunities in global equities and foreign exchange last week. Yet no event matched Dr Mario Draghi's "Mamma Mia" of all ECB monetary bazookas on March 10. The ECB cut its deposit rate to negative 0.4 per cent and the refi rate to zero. The ECB also expanded its asset purchase programme from 60 to 80 billion euros and embraced non-bank corporate bond purchase. As in 2012, Mario Draghi did "whatever it takes" to combat deflation and save the embattled European Project, the sacred dream of Old World statesmen from Rome '57 to Maastricht '91.
The foreign exchange market went ballistic as Draghi's Press conference began. The euro first tanked to 1.825 as traders cheered the sheer nature and scale of the ECB monetary bazooka. However, sentiment on Planet Forex did a total U-turn when Draghi said he did not expect more rate cuts, thus diluting his message. The German Dax fell 500 points. The euro/dollar surged to 1.12. Money was made and lost on an epic scale, thanks to the Italian central banker in Frankfurt, still pressured by the hard money zealots of the Bundesbank. Seven years after Lehman, it is financial suicide to ignore the smoke signals from the world's major central banks.
Credere is an ancient Latin verb that means "belief". The currency market lost their credere in the Draghi ECB. After all, the last thing Draghi wanted was a spike in the euro and a meltdown in European banking shares. Draghi's bazooka was an aggressive signal that the ECB was willing to pay banks to lend money and accept credit risk on corporate bonds in its desperation to combat deflation risk in the eurozone. Negative real rates have scared investors in both Europe and Japan (where savers anxious to hoard cash at home have led to a run on safes). This is the reason Europe's banks plunged after the ECB Press conference.
Draghi's reluctance to predict more rate cuts has reinforced fears among currency gnomes that global central banks have exhausted their monetary ammunition. The ECB also lowered its forecast for growth and inflation in 2016, a tacit admission of policy failure. The ECB has failed its inflation mandate since February EU inflation was a pathetic minus 0.2 per cent, a legacy of the crude oil and commodities sell off.
I cannot see a major rise in the euro in the next three months as the data from the Old World, unlike the US, lacks accelerating momentum. German export weakness, French industrial production woes, Chinese hard landing and Brexit angst, the migrant crisis and the rise of right wing populist political parties, will all continue to weigh on the euro. The euro is still fundamentally overvalued against the US dollar at 1.12, though I concede it could overshoot on a spasm of risk aversion in global markets since the euro is a funding currency for leveraged carry trades. Yet the ECB monetary bazooka is all too real even if it misfired last week. The euro is headed lower, possibly to as low as 1.04.
New strategy ideas? The New Zealand dollar is a strategic short near 0.67 cents for a 60 cent target since the Reserve Bank could well cut interest rates again as inflation expectations slump. Milk prices are in decline and the kiwi will depreciate as the white hot US labour market data increases the odds of a June rate hike, now at least 45 per cent in the Fed Funds futures markets. While the People's Bank mandarins and the Politburo princelings have stabilized the Chinese yuan for now, a gentle yuan depreciation is inevitable. Rate cuts in New Zealand will also deter Japanese carry trade interest in the kiwi dollar. In any case, sluggish, uncertain economic growth and volatile asset markets are not exactly bullish for carry trade. The Reserve Bank of New Zealand's latest rate cut slashes the bullish case for the Kiwi dollar in 2016.
I would also short the British pound (cable) at 1.43 since Brexit risk premia will only rise until the June 23 referendum. This means downside risk in sterling could still be as low as 1.35 on cable. It is far too risky to take a position on sterling just on a geopolitical binary event as the polls on the Scotland referendum and the general election taught me.