Draghi Destroys The Euro

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Market Drivers November 21, 2014

Draghi – essential to bring inflation target without delay
UK PSNB 7.1B vs. 6.9B
Nikkei .33% Europe .95%
Oil $76/bbl< Gold $1188/oz.

Europe and Asia:
NZD Credit Card Spending 6.7% vs. 4.5%
EUR Draghi speech – dovish
GBP PSNB 7.1B vs. 6.9B

North America:
CAD CPI 08:30

The euro was trounced today in early European trade losing more than 100 points off its highs in the wake of a very dovish speech by Mario Draghi in which we reiterated the idea that the ECB will have to dramatically expand QE in order to fight growing disinflation in the region.

Speaking in front of European Banking Congress Mr. Draghi noted that the ECB must be very watchful that low inflation does not filter into the economy in a negative way and reaffirmed the notion that its was essential for ECB to bring inflation to target without delay.

Mr, Draghi is clearly trying to use the ECB mandate on price stability as means to stimulate the moribund EZ economy which just yesterday showed further signs of slowdown especially in the region’s largest economy – Germany. He is also clearly keeping an eye on FX rates as the depreciating euro is one way of trying to jump start the export driven region. He went out of his way to note that QE in both Japan and US has significant depreciative effects on FX rates.

It appears that the ECB is keen on driving the EUR/USD rate towards the 1.2000 level and today’s rhetoric may have been designed to display a reaction the the recent short covering rally that drove the pair up to 1.2600 rather than provide any immediate policy guidance to the market.

With respect to QE, Mr. Draghi faces a serious challenge from the Germans that oppose such dramatic policy moves and even consider them to be unconstitutional. Still with the EZ economy on the brink of contraction and deflationary forces showing no signs of abatement the ECB will have to act sooner rather than later to address the growing problems in the region and the market will be focused on the next meeting in December to see what actions the authorities will take.

In the meantime, barring any sudden contraction in the US economy, the divergence between US and EU monetary policies will only widen leaving EUR/USD in sell the rally mode for the foreseeable future. With no US data on the docket today the North American session will likely be driven by technical flows with shorts trying to see if they can run the 1.2400 stops before the day’s end.

Boris Schlossberg
Managing Director

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