Draghi dragged down the euro and kept the drama going on. On his 68th birthday, the ECB president gave one of his best shows. He managed to push down the euro with minimal action and no commitment at all. Draghi showed his strength and quickly passed the ball to the others’ courts as if nothing had happened.
Here is a quick summary of the master move and how it creates a headache for other central banks:
The Chinese stock market crash, devaluation and rate cuts strengthened the euro on safe haven flows. Also the consequent speculation that the Fed would not raise rates contributed to a stronger common currency.
This isn’t what Europe needs right now: inflation is too low and the euro hasn’t been weak for enough time to really set exports and the economies on a sustainable upward trajectory.
Should he have hit the euro hard by announcing more QE, escalating currency wars? Or awaited the Fed and allowed the euro to rise and losing in these wars?
Draghi found the perfect middle ground.
On one hand:
- Increased the issuance limit on bond buying from 25% to 33%
- Lowered forecasts and added there were downside risks to them
- Said they are ready to act
On the other hand:
- Did not increase QE and even said it wasn’t on the agenda
- Said that so far there it is “too soon that inflation is deteriorating”.
- Noted that “we have to wait and see” regarding the current turbulence.
Win win win
The outcome of this balanced move was:
- 100 pips+ fall in EUR/USD – certainly a powerful market impact
- Showing he is willing to act
- And quickly moving the ball to the Chinese and American courts.
The other players have a bigger headache now:
- China wants a shift to internal consumption but the recent devaluation move certainly shows it is minded on exports.
- The Fed says it is data dependent on the US economy, but has its eyes on Wall Street and the strong dollar.
All in all, the three major global economies are very connected to one another and depend heavily on one another. By making this move, Draghi showed that he may be behind the previous moves, but breathing heavily on the necks of the others.
We’ll now wait for the Fed, which means looking for hints at the NFP.Get the 5 most predictable currency pairs