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22 Jan 2016
Super Mario signals high chance of easing in March – MUFG
FXStreet (Delhi) – Derek Halpenny, European Head of GMR at MUFG, suggests that the tumultuous start to 2016 for the financial markets appears to have had a notable impact on the ECB as President Draghi gave a clear signal that additional monetary easing is under consideration just seven weeks since the last easing on 3rd December.
Key Quotes
“The financial market reaction back then indicated that market participants felt the ECB should have done more and that view appears correct now. The signal of more easing will come as welcome relief to many around the world with Japanese markets in particular responding to the news. The Topix Index jumped 5.6% today while oil producers will also be relieved by the surge in crude oil prices. Brent crude oil is up nearly 15% from the intra-day low hit on Wednesday.
But where there was a more subdued reaction was in foreign exchange - the euro did fall but only modestly. From yesterday’s opening rate of 1.0890, EUR/USD is down a mere 0.6%. On a trade-weighted basis, it was close to unchanged yesterday.
The muted EUR fall makes sense to us. Firstly, despite only easing at the last meeting, it was no surprise that Draghi was dovish yesterday.
Furthermore, we are not convinced this latest communication from President Draghi offers compelling reason to re-enter the monetary policy divergence trade. If financial market conditions do not improve and the ECB does ease on 10th March, in all likelihood the FOMC will be using the same reasons to not raise rates six days later.
For sure, there are grounds for arguing that the euro can remain under downward pressure. But it’s questionable whether investors will rush back into the relative monetary policy trade at this stage. The underwhelming December announcement has likely instilled a degree of caution in re-entering or building further the relative monetary policy trade. More probable is that under continued risk averse conditions, the prospect of ECB easing will limit EUR upside.”
Key Quotes
“The financial market reaction back then indicated that market participants felt the ECB should have done more and that view appears correct now. The signal of more easing will come as welcome relief to many around the world with Japanese markets in particular responding to the news. The Topix Index jumped 5.6% today while oil producers will also be relieved by the surge in crude oil prices. Brent crude oil is up nearly 15% from the intra-day low hit on Wednesday.
But where there was a more subdued reaction was in foreign exchange - the euro did fall but only modestly. From yesterday’s opening rate of 1.0890, EUR/USD is down a mere 0.6%. On a trade-weighted basis, it was close to unchanged yesterday.
The muted EUR fall makes sense to us. Firstly, despite only easing at the last meeting, it was no surprise that Draghi was dovish yesterday.
Furthermore, we are not convinced this latest communication from President Draghi offers compelling reason to re-enter the monetary policy divergence trade. If financial market conditions do not improve and the ECB does ease on 10th March, in all likelihood the FOMC will be using the same reasons to not raise rates six days later.
For sure, there are grounds for arguing that the euro can remain under downward pressure. But it’s questionable whether investors will rush back into the relative monetary policy trade at this stage. The underwhelming December announcement has likely instilled a degree of caution in re-entering or building further the relative monetary policy trade. More probable is that under continued risk averse conditions, the prospect of ECB easing will limit EUR upside.”