Euro Crushed By Coeure

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Market Drivers May 19, 2015

Euro Loses more that 100 pips as Couere talks about accelerated QR and lower depo rates
UK CPI turns negative
Nikkei 0.68% Europe 2.10%
Oil $59/bbl
Gold $1218/oz.

Europe and Asia:
AUD RBA Minutes
NZD Inflation expectations 1.9% vs. 1.8%
GBP UK CPI -0.1% vs. 0.0%
EUR ZEW 61.2 Vs. 62.4

North America:
USD Building Approvals 8:30

A speech by Benoit Coeure, the ECB Board council member tasked with market operations, sent euro reeling in early European dealing today with the single currency dripping more than 150 points from its New York session close.

In remarks made last night at a college in London, but only released this morning, Mr. Coeure challenged some of the sacrosanct assumptions of monetary policy suggesting that the central bank may go beyond the zero bound level in order to achieve policy goals.

Mr. Coeure noted that amongst other things the deposit rate could in theory become even more negative. He also stated that QE will be front loaded to the start of the summer so as to avoid the summer lull when most of the European markets lose liquidity in August. Mr. Coeure insistence that lower bound is not a hard constant stands at odds with earlier remarks made by Mario Draghi who has always insisted that ECB could not go much beyond the zero interest rate level in stimulating monetary policy. It also suggests that some ECB members may feel that policy must become even more aggressive if the ECB is to achieve its task of stimulating growth in the moribund region.

Mr. Coeure remark’s certainly took the market by surprise and pair quickly tumbled more than 100 points as traders reacted to the news. Perhaps Mr. Coeure’s remarks were simply made for dramatic effect as a form of jawboning the currency lower. The pair has bounced almost 1000 points off its yearly lows much to the dismay of EU policymakers who would like to see it lower in order to stimulate inflation and help export demand grow. In any case Mr. Couere’s remarks continue to show that ECB policy is diametrically opposed to Fed’s goals as Mr. Draghi and company look for ways to further ease credit conditions while Ms, Yellen and the Fed consider tightening options.

Elsewhere, in UK the CPI data came in even lower than expected at -0.1% vs. 0.0% eyed indicating that price pressures are non existent in UK for now further confirming BoE view that rates are likely to remain stationary for the foreseeable future. Tomorrow’s MPC meeting is likely to result in 0-0-9 and could weigh on cable as well pushing the pair below the 1.5500 level.

With no major US data on the docket it will be interesting to see how US traders react to the overnight news. With EUR/USD already down sharply the pair may attract some bargain hunters, but if it does not and makes fresh lows in US session then the price action will suggest that the euro short covering rally may have peaked.

Boris Schlossberg
Managing Director

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