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Draghi: Please don’t let me be misunderstood – Westpac

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Mar 18, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    Sean Callow, Research Analyst at Westpac, suggests that with a week to assess the fallout from the ECB’s raft of policy easing measures, they remain more impressed than the FX market seems to be.

    Key Quotes

    “EUR/USD was just below 1.10 as the various new policies were revealed, slipping to about 1.0825 in response. But the euro then reversed in a nasty squeeze during President Draghi’s news conference, a move widely blamed on his statement (twice) that “we don’t anticipate that it will be necessary to reduce rates further.” So with the euro trading considerably stronger than pre-meeting levels a week later, does this mean Draghi has again failed to deliver?

    Well if your only metric is the currency then the meeting would certainly be a disappointment so far. But Draghi’s press conference made clear that the euro is not high on the list of priorities, with very little talk of exchange rates. This makes sense in light of the Eurozone’s growing current account surplus, which is now 3% of GDP, a record surplus since the euro’s launch in 1999.

    Instead the ECB took aggressive steps to drive both government and private sector yields even lower, boosting asset purchases to a whopping EUR80bn per month, now including corporate debt. It will also offer 4 year loans to banks, linked to new lending; if banks make enough new loans, the ECB will lend the funds at rates as low as -0.4%, an unprecedented move. These cheap loans don’t start until June, the corporate debt purchases begin “towards the end of the second quarter.” So while not targeting the euro, the ECB measures are likely to weigh on the single currency in coming months, especially if the Fed does resume raising rates in June. We would be inclined to sell into any EUR/USD probe towards 1.14 in coming days.”
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