20150123 – TOWING THE LINE

High Low High Low
EUR/USD 1.1375 1.1314 USD/ZAR 11.4378 11.3842
GBP/USD 1.5028 1.4962 GBP/ZAR 17.15 17.08
EUR/GBP 0.7584 0.7551 USD/RUB 64.99 62.62
USD/JPY 118.82 118.09 USD/NGN 188.0 191.1
GBP/CHF 1.3104 1.3031 S&P 500 2065 2059
USD/ILS 3.9671 3.9428 Oil (Brent) 49.78 49.26


As expected the ECB did announce a programme of quantitative easing, but surprisingly the amounts and length of the programme are larger and more aggressive than anticipated. In effect the ECB becomes the last major central bank to conduct such extraordinary measures. In a way, and this is just my personal view, I feel less respect for them now for towing the line, but there you go! I’ll start by summarising the key points:

  • €60bn per month – the rumours had been for €50bn per month
  • Starting from March, and to last until at least September 2016 or until inflation has returned to near its 2% target – some had speculated on a 12 month programme
  • The programme includes the purchase of bonds with maturities up to 30 years; it will focus mainly on investment grade debt, but Greek and Portugese bonds will be included (these are rated as junk)
  • National central banks will assume most of the responsibility for losses of their own national debt (a concession to Germany), although there will be risk sharing on 20% of the asset purchases
  • Mr Draghi said “a large majority [of the ECB’s governing council], so large we didn’t need to take a vote”


As you can see from the table above, the euro is trading substantially weaker than this time yesterday. Not a shock, as we at ParityFX have indicated over the last few months this was always going to happen if QE was implemented. In other markets, equities rallied, with European stocks unsurprisingly being the outperformers, following the announcement. The rally continues this morning with the Eurostoxx index up 1.5% already. European bonds were also big winners with the Bund yield falling to a new all-time low of 0.38% at one point yesterday. Commodities had a good day too, gold traded up to $1307 and Brent oil went as high as $50.44.


What to make of all this? Well to start off with, the signs were quite clear and I hope I was able to successfully convey that yesterday. This was going to happen. There is a very real chance now that EUR/USD could achieve parity sooner than I have previously suggested. I wouldn’t be shocked to see it happen this year. Other European currencies will be victims of this move, and already we see GBP/USD trading below 1.50. For those who have hoped to sell pound sterling at levels like 1.60… I would suggest that the odds of that happening sometime in the next few years took a real dent yesterday afternoon, this is a new world order now, and we all have to deal with it.


In terms of macro-economic data, we should see UK retail sales out later on this morning. The surprise would be if we get an improvement. All the signs have been on the disappointing side for the UK economy recently, if you exclude employment data. Quite a puzzle, and certainly enough to almost snuff out the chances of interest rate hikes in the UK in 2015. We also get retail sales and inflation data out of Canada, as well as Manufacturing PMI in the United States. All quite interesting stuff.


I want to be clear on this.. what we are seeing right now, is a euro thing. We have talked at length about the bullish trend of the US dollar, but so far this year, the euro’s obvious vulnerabilities have dominated. Going forward, while I continue to maintain that this will be a strong year for the US economy, the chances of the Federal Reserve hiking rates are probably less than I have suggested in recent times. In a world where several European central banks have cut their interest rates to negative territory, where the ECB and BoJ are now conducting aggressive quantitative easing, where energy prices have collapsed and wiped out any immediate inflationary threat, it is unlikely that Federal Reserve officials will go out of their way to raise the Federal Funds Rate any time soon. There’s unlikely to be any need for it because the US dollar will be the currency of choice to own, we still expect it to appreciate strongly this year, and that appreciation is a monetary tightening of sorts. I would however add, with all this new monetary stimulus coming from Europe, the decline in commodity prices could stop, and who know even… reverse. This is something to watch out for, but my base case is that OPEC supply will probably continue to supress energy prices for now.



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