Why ECB Hawks Are EuroZone’s Worst Enemies

Posted on

Market Drivers Dec 9, 2015

Dollar slips in EU trade
CNY inflation improves
Nikkei -0.98% Eurostoxx -0.39%
Oil $37/bbl
Gold $1074/oz

Europe and Asia:
AUD Home Loans -0.5% vs. -1.0%
CNY CPI 1.5% vs. 1.4%
EUR GE TB 22.5B vs. 21.7B

North America:
USD Wholesale Inventories 10:00

The dollar slipped in early European trade today as the short squeeze in the euro resumed after ECB member Ewald Nowotny stated that the market massively misread the ECB intentions.

Mr. Nowotny said that market expectations before the policy announcement were absurd, noting that analysts had the fundamentals all wrong. He said that it’s not the job of the ECB to correct market expectations but rather to follow the policy it thinks is best.

To say that Mr. Nowotny’s comments were disingenuous would be too kind at best. Its is indeed the function of the central bank to set market expectations in order to manage price levels. And as some analysts have pointed out if the ECB did not attempt to do so the euro would much higher than current levels.

However, Mr. Nowotny’s hawkish harangue shows that there must be serious conflict on the size and scope of the ECB QE program. The hawks on the board are no doubt emboldened by the early signs of growth in the region and are therefore reluctant to add any further stimulus. Yet their very hawkishness could frustrate Mr. Draghi’s attempts to generate a sustainable recovery in the region by counterproductively pushing the euro higher. Already the pair notched nearly 50 points in early European trade as it inches towards the 1.1000 figure after Mr. Nowotny said that ECB has no exchange rate target.

That too is of course a massive misstatement of ECB’s intentions as the central bank is very well aware that the exchange rate mechanism is one of the most efficient policy levers to stimulate growth in export centric EZ region. There is no doubt that ECB members would like to keep the EUR/USD under the 1.1000 barrier for a prolonged period of time in order to both generate export growth and eliminate disinflationary forces from the system.

Mr. Nowotny’s comments however have had the opposite effect and it will be interesting to see if other ECB members begin to jawbone the euro once again if the unit appreciates further. For now the pair remains in a tight 1.0800-1.1000 range as traders await the FOMC next week while the eco calendar remains barren for now. With only wholesale inventories on tap today the market is likely to remain relatively quiet with the technical levels controlling the price action for now.

Boris Schlossberg
Managing Director

Leave a Reply

Your email address will not be published. Required fields are marked *