- Draghi’s Dovish Remarks Suffocate EUR
- Market expects ECB to announce new measures in December
- Greater Euro/U.S rate divergence needs to be priced
The euro bear got a subtle hint yesterday to consider “not” booking any EUR profits just yet, all because the EUR bull happened to be blinded by flash purchasing mangers’ index (PMI) numbers. The ones that did nothing should be thanking European Central Bank (ECB) President Mario Draghi this ‘frantic’ Friday morning, as he managed to “put the boot in” with another whatever-it-takes kind of moment.
EUR Plummets on Inflation Expectations
The EUR (€1.2438) took a sharp turn lower after Draghi’s speech regarding inflation at the Euro Banking Congress in Frankfurt on Friday. The ECB chief again indicated that the eurozone’s policymakers will do what they must to raise inflation back to the desired target. His assessment of growth and inflation is supporting market expectations that the ECB will need to adopt full-blown quantitative easing sooner rather than later.
His assessment of the eurozone in his speech would strongly suggest that the ECB is about to up the ante as early as the December meet in a few weeks. His dovish comments — inflation is more challenging, committing to recalibrating size, pace, and composition of asset purchases, and the potential broadening of channels through which the ECB intervenes — are currently suffocating the EUR outright and on the crosses (fresh day lows for EUR/JPY €146.46, EUR/GBP €0.7938).
The SNB can breathe Easier
Not surprisingly, EUR/CHF has managed to climb to a one-week high (€1.2032) on thoughts of lower ECB funding. European/U.S. rate divergence is lending the Swiss National Bank (SNB) a helping hand ahead of the Swiss gold referendum on November 30. With the U.S. dollar having a strong run this morning driven by “what if” scenarios, it managed to push USD/CHF higher ($0.9670), and it allowed EUR/CHF to be supported to gradually move away from the SNB’s well publicized “floor.”
Draghi pointed to yesterday’s flash PMI results to indicate that a strong recovery is unlikely in the coming months. His sense of urgency to lift inflation expectations “as soon as possible,” has a percentage of the market already anticipating the ECB will sweeten the terms of the TLTRO (targeted long-term refinancing operation) in December, while leaving the debate over balance sheet expectations until January.
Draghi needs to get a real “bang for his buck” before hot air whistles away and the ECB loses street credibility. Eurozone policymakers will need to make sure that they have exhausted all existing balance sheet avenues before they begin to charge down the route of no return: sovereign bond purchases. To date, the ECB has had the minimum of success in expanding its balance sheet. In fact, it has actually declined -€11B since the beginning of September. The EUR will remain very sensitive to short interest rate trends, with further downside very much on the cards.
On Tap for Next Week
If you thought the FX market was slow this week, next week will be a challenging one for most, as both FX ranges and market volumes are expected to take a big step back due to various bank holidays.
Japan will not be kicking things off in the Asian session as they celebrate their Labor Day on November 23. Bank of Japan (BoJ) Governor Haruhiko Kuroda will grab most of the attention from his planned speeches on Monday. He is scheduled to speak at a meeting with business leaders in Nagoya and at the Paris Europlace International Financial Forum in Tokyo. The governor is not expected to stray too far from the BoJ’s official rhetoric from last week’s monetary policy meet. Meanwhile, a German Ifo business confidence survey due on November 24 should be capable of keeping the EUR moving.
The market will try and engage with the minimum of interest in U.S. preliminary gross domestic product (GDP) figures on November 25, and U.K. quarter-over-quarter GDP data on November 26. No one wants to have too much strapped on as the U.S. begins to celebrate Thanksgiving, the largest and most traveled holiday period in the American calendar. Historically, FX volumes plummet over the two-day festivities (it’s a financial half day, but most make it a long weekend). Be aware that the Organization of Petroleum Exporting Countries happens to have an all-day meeting scheduled for the same day — could the ministers surprise the crude oil market?