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8 Feb 2013
Forex Flash: Subtle verbal intervention by Draghi enough for now – BTMU
Derek Halpenny, European Head of Global Markets Research at the Bank of Tokyo Mitsubishi UFJ notes that all it took were some subtle comments by President Draghi in regard to the level of the Euro to trigger a 1.0% drop in EUR/USD.
He writes, “There was no use of the word “brutal” but by linking the appreciation of the Euro to downside risks to the inflation outlook President Draghi brought a halt to the Euro’s advance. Our current assumption is for a further rate cut in Q3 in response to the Euro remaining above the 1.3000 level and possibly above the 1.3500 level for much of H1 2013.”
Hapenny feels that there is much to worry about in the Eurozone and although the worries of an actual break-up of the single currency may now have been reduced considerably, the economic conditions will remain dire and hence the tolerance of a strong Euro will be much less than before. Still however, he is not convinced that these mere words from Draghi will be enough to convince the financial markets. The removal of LTRO liquidity – although optional differentiates the Euro from other key currencies and actions speak louder than words.
Another hefty removal of liquidity in the first LTRO 2 window toward month-end could trigger a Euro rebound and force the ECB into a more explicit signal of a rate cut given the worsening growth and inflation outlook. That may take a few more months to evolve. We may finally get an EU budget deal later today with rumours of a deal based on the first real-term budget cut in EU history. That may help stabilise the single currency which is being undermined in part by some renewed liquidation of yen short positions – possibly ahead of a Japan holiday on Monday and the Chinese holidays.
He writes, “There was no use of the word “brutal” but by linking the appreciation of the Euro to downside risks to the inflation outlook President Draghi brought a halt to the Euro’s advance. Our current assumption is for a further rate cut in Q3 in response to the Euro remaining above the 1.3000 level and possibly above the 1.3500 level for much of H1 2013.”
Hapenny feels that there is much to worry about in the Eurozone and although the worries of an actual break-up of the single currency may now have been reduced considerably, the economic conditions will remain dire and hence the tolerance of a strong Euro will be much less than before. Still however, he is not convinced that these mere words from Draghi will be enough to convince the financial markets. The removal of LTRO liquidity – although optional differentiates the Euro from other key currencies and actions speak louder than words.
Another hefty removal of liquidity in the first LTRO 2 window toward month-end could trigger a Euro rebound and force the ECB into a more explicit signal of a rate cut given the worsening growth and inflation outlook. That may take a few more months to evolve. We may finally get an EU budget deal later today with rumours of a deal based on the first real-term budget cut in EU history. That may help stabilise the single currency which is being undermined in part by some renewed liquidation of yen short positions – possibly ahead of a Japan holiday on Monday and the Chinese holidays.