Yesterday, there was pent up expectation that the ECB's latest minutes, by being structurally dovish and thus the opposite of the Fed's own minutes, would unleash another round of EUR weakness. This did not happen, and instead not only did the EUR jump during the day, but the USD saw an unexpected round of all day weakness. Many were surprised by this response. It turns out Mario Draghi was merely biding his time, and in a speech released moments ago, titled "Monetary Policy: Past, Present and Future [6]" delivered at the European Banking Congress, Draghi pulled another "whatever it takes" card, and promptly sent the Euro currency reeling, if only for the time being.
Here are the key highlights:
- DRAGHI SAYS ECB WILL DO WHAT IT MUST TO RAISE INFLATION QUICKLY
- DRAGHI: ECONOMY NEEDS MORE AID IF RECOVERY NOT SELF-SUSTAINING
- DRAGHI: BALANCE OF RISKS TO PRICE STABILITY SKEWED TO DOWNSIDE
Some of the key excerpts:
- “If we decide that the current trajectory of our policy is not sufficient to achieve that objective, we will do what we must to raise inflation as quickly as possible. That is what our price stability mandate requires of us,” ECB President Mario Draghi says in speech in Frankfurt.
- “In making our assessment of the risks to price stability, we will not ignore the fact that inflation has already been low for some time”
- “If we conclude that the balance of risks to our medium- term price stability objective is skewed to the downside, we will act by using all the instruments available within our mandate”
- “Low core inflation is not something we can be relaxed about, as it has in the past been a good forecaster for where inflation will stabilise in the medium-term”
- “The question we face now is not therefore whether we have the tools available to provide the appropriate degree of monetary stimulus. We have proven that. The question is one of calibration”
"Moar" is coming:
"growth momentum remains weak and inflation remains well below our objective of below but close to 2%."
Much "moar":
"The Governing Council is committed – unanimously – to using both unconventional and conventional instruments to deal effectively with the risks of a too prolonged period of low inflation."
For those who skip straight to the conclusion, it doubled-down:
"So let me reiterate what I said here last year: if we decide that the current trajectory of our policy is not sufficient to achieve that objective, we will do what we must to raise inflation as quickly as possible. That is what our price stability mandate requires of us."
The impact on the Euro was predictable:
[7]
... But the reaction may be shortlived. Here is CA's Valentin Marinov explaining why:
So we got yet another '...do what it takes speech' by Draghi. I guess the expression was put in there to evoke the spirit of the, by now, famous speech from July 2012, which helped to solve the sovereign debt crisis.
EUR went promptly lower presumably on the back of Draghi's signal that the ECB will do what it must to lift the EZ inflation quickly. For some that maybe the tantamount of aggressive easing on December 3. The thing is, however, there is not much new in there to suggest that the ECB will actually exceed the already dovish market expectations.
Indeed, it seems that, by now, everyone we talk to is expecting a 10bps deposit rate cut and QE-extension (even an increase in the monthly purchases). I am struggling to see how the ECB will exceed the already dovish expectations. In addition, one potential mistake people are making thinking about the ECB is that they will go and fire their bullets in one go. I disagree with that. I think that they realize this is a long-term process and they don’t want to corner themselves like the BoJ by acting too aggressively.
I was also thinking about how people like to compare EUR and JPY all the time. By implication, they like to think of ECB QE2 as having the same impact on EUR as it BoJ QE2 had on JPY. I think that there are at least two important differences there:
1/ The BoJ QE2 came on the back of the GPIF reform which had set in motion a massive outflows abroad
2/ Europe is far behind Japan in terms of institutional set up to support the so called EUR-funded carry trades. In other words there are no uridashi bonds or double decker funds for the EZ investors to export EUR. These have been available in Japan for years
Our call for EUR/USD is a grind lower from here towards the lows of the year. I think, however, extreme moves on the downside maybe less likely for now
