(MENAFN- Khaleej Times)There is now no doubt that world financial markets have embraced the King Dollar theme as it scales March highs. Yet the real macro disaster in the past two months has been in commodity currencies not the Euro sterling or the yen. West Texas crude has fallen 25 per cent since its recent $61 peak leading to eight to 11 per cent losses in the Norwegian kroner Canadian dollar Russian rouble and the Aussie dollar. The latest Greek deal with the Troika has not led to any euro strength. Au contraire in fact. The currency gnomes have no confidence in the euro even though German IFO business confidence and credit growth data exceeded consensus. Ironically despite the uber-dovish monetary jawboning of the Yellen Fed since last autumn Planet Forex has bid up the US dollar mainly since the oil shock China carnage and US data momentum are all greenback bullish.
However real ballast behind my King Dollar macro idea was the Bank of Japan's "October shokku" and the ECB's historic quantitative easing programme both unthinkable without the oil shock. The euro has no less than a 57 per cent weight on the US Dollar Index. So it was no surprise that Dr Draghi's monetary regime change on QE and the spectacular fall of the euro from 1.40 to 1.09 makes him the godfather of the King Dollar trade. Dr Draghi knows that deflation in Europe has a structural component (50 per cent youth unemployment rates in the Club Med French trade unions and a derigiste Socialist in the Elysee Palace German/Benelux demographics Greek banking panic etc) making a trillion-dollar asset purchase programme essential. In essence the Draghi ECB has cut the euro's umbilical cord with the hard money zealots of the Deutsche Bundesbank. Yet Mario Draghi would not have been able to exorcise the Weimar obsessed ghosts of the Bundesbank without the oil shock or the HICP below zero. This is a seminal moment in the evolution of the ECB since unconventional monetary policy was taboo (verboten und unmglich mein herren!) in Jens Weidmann's Bundesbank and Angela Merkel's Reich Chancellery. This was the "January shock" the $1.6 trillion asset purchase programme announced by the Draghi ECB scheduled to continue until September 2016. This was hugely euro negative and the election of Syriza added a maverick dimension to Athens-Berlin debt politics. However now that German data has improved and the HICP inflation data has ticked higher to 0.9 per cent last month the Bundesbank has shortened the maturity of its bond purchases. In short Dr Weidsmann has just announced a monetary taper in Frankfurt even though Planet Forex has virtually ignored his move. The Bundesbank move comes against another savage fall in crude oil. Even though West Texas has fallen to $47 US shale oil production has risen 500000 from its 9.1 mbd level last November. Saudi Arabia Russia and Iraq alone are producing almost 26 mbd a time when Chinese demand has gone bust. I reiterate my call that Brent will test its 2009 lows at $40. Dr Draghi's target of a 1.5 per cent eurozone inflation rate in 2016 is totally unrealistic. Dr Draghi has an MIT doctorate in economics and so knows that the Black Death in crude oil/copper is flashing a deflation SOS that will slam West Europe. Economists estimate that another $5 fall in Brent crude could cause eurozone inflation to fall 25 basis points after a one-year lag. The conclusion is unmistakable; sometime this autumn Dr Draghi will be forced to announce a "shock and awe" increase in his bond purchases exactly as the Kuroda Bank of Japan did in October 2014. The yen slumped from 105 to 120 against the US dollar after the "October shokku". I think the coming "Draghi QE shock" will slam the ruro below parity possibly down to Wim Duisenberg-era levels below 0.9. The Chinese State Council's statement suggesting a wider trading band for the renminbi led to another meltdown in Shanghai Shenzhen and Hong Kong H share equities. The Politburo's market rigging scheme has failed and valuations in Chinese A shares are still loonie tune. Investors ignore the 15-17 per cent fall in year on year Indian Taiwan Thai and Indonesian exports at their own peril. Dr Copper fell 10 per cent in July. Crude oil lost a shocking 19 per cent in July. My global deflation scenario is not a mid-summer night's nightmare.
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