28 Nov 2014
As long as inflation is too low, the ECB will want to weaken the euro - Commerzbank
FXStreet (Córdoba) - According to Ulrich Leuchtmann, analyst at Commerzbank, the FX market is less focused on QE than the question of how important a weaker euro is to the ECB.
Key Quotes
"ECB President Mario Draghi was extremely explicit last Friday. The 'normal' channels via which an expansionary monetary policy stokes inflation are currently blocked. Moreover, his remarks contained a broad hint. Not very ambiguously, the ECB President signalled that the current and possibly further liquidity operations are mainly successful because they weaken the euro. Draghi can hardly express this more clearly at next Thursday's ECB press conference".
"After all, one could in this case accuse him of 'exchange rate manipulation', and thus of a breach of the joint commitment of the G7 central bank chiefs to refrain from precisely such manipulation. But within these limits, Europe's supreme guardian of the currency will try to talk the euro down more and more".
"Down to what level?, we are sometimes asked. This question has been put the wrong way. As long as inflation is too low, the ECB will want to weaken the euro. So it is rather a question of the speed of the depreciation than the level of EUR/USD".
"But increasingly clear announcements of a QE programme (most recently by ECB Vice President Constancio) as such now barely work to weaken the euro. This is because – since the ECB has announced a target for its balance sheet total – the question whether QE will come or not is no longer about whether the ECB will provide more or less liquidity but only about the instruments with which it will reach its goal. This is something the FX market cares precious little about".
Key Quotes
"ECB President Mario Draghi was extremely explicit last Friday. The 'normal' channels via which an expansionary monetary policy stokes inflation are currently blocked. Moreover, his remarks contained a broad hint. Not very ambiguously, the ECB President signalled that the current and possibly further liquidity operations are mainly successful because they weaken the euro. Draghi can hardly express this more clearly at next Thursday's ECB press conference".
"After all, one could in this case accuse him of 'exchange rate manipulation', and thus of a breach of the joint commitment of the G7 central bank chiefs to refrain from precisely such manipulation. But within these limits, Europe's supreme guardian of the currency will try to talk the euro down more and more".
"Down to what level?, we are sometimes asked. This question has been put the wrong way. As long as inflation is too low, the ECB will want to weaken the euro. So it is rather a question of the speed of the depreciation than the level of EUR/USD".
"But increasingly clear announcements of a QE programme (most recently by ECB Vice President Constancio) as such now barely work to weaken the euro. This is because – since the ECB has announced a target for its balance sheet total – the question whether QE will come or not is no longer about whether the ECB will provide more or less liquidity but only about the instruments with which it will reach its goal. This is something the FX market cares precious little about".