ECB President Draghi once again stated that Eurozone officials stand ready to support the ongoing recovery in the region. He made his comments at an event in Frankfurt, reinforcing his recent comments that the central bank is battling downside pressures to meet the ‘just under 2%’ inflation target. Weak energy prices and slowing global trade were the culprits of course. While he considers the QE exercise undertaken at the start of the year to have been largely successful, President Draghi has also made it clear that further action to loosen Eurozone money supply is possible at the ECB’s December 3rd meeting. Eurozone policy makers may or may not carry out this threat, but one thing is for sure, his comments are doing a job – probably its intended job – of weakening the euro. The single currency remains under pressure against both the dollar and pound sterling.
For want of a better description I consider this type of… manipulation… as aggressive action. Contrast that with the conundrums facing both the Bank of England and the Federal Reserve. These central banks are actively debating initiating a tightening phase of monetary policy. Even if they are actively paying attention to their exchange rates at the present time, it is more likely that they are attempting to give signals that don’t unduly strengthen their currencies. I would describe this as more passive action. On that basis, you have the ECB who look like they’re trying to weaken their currency while the actions of the custodians of USD and GBP are more directed towards not unduly boosting theirs. Now I ask you… in the battle between the 3 currencies, which one will you bet on to weaken? I agree… the euro!
While in recent weeks emerging market currencies have experienced relief rallies versus the dollar, one would expect that as the reality of imminent normalisation in the United States gets closer, these currencies will again come under pressure. Not least because corporates in these markets borrowed dollars heavily in times of plenty. It should be noted that there are a large number of dollar victims amongst corporates in the United States, indeed I read a report recently which suggests that drop in corporate America’s profitability due to the strong dollar is already approaching $100bn for this calendar year. That’s not a small sum of course, but it’s likely to get tougher if the greenback is in the midst of a huge long term appreciation phase, these companies will have to adapt or die, just as European corporates had to do the same when the euro was at peak strength. The point is.. don’t count on the benign period of rallying risky assets we’ve seen in recent weeks to continue for too long. As I’ve said before, I think this equity market rally can persist until year-end, but remember how nasty January was this year?
I am monitoring the 1.5440 – 50 zone in GBP/USD, a move above this area will confirm that my preferred path for cable is incorrect. I guess I’m not the only one who is concerned about a more hawkish than forecast voting pattern at tomorrow’s MPC. I suspect super Thursday and non-farm payrolls on Friday will be a key focus for currency markets in the hours to come.
Any financial promotion contained herein has been issued and approved by ParityFX Plc (“ParityFX”); a firm authorised and regulated by the Financial Conduct Authority (“FCA”) as a Payment Services Institution with registration number 606416. It is for informational purposes and is not an official confirmation of terms. It is not guaranteed as to accuracy, nor is it a complete statement of the financial products or markets referred to.
Opinions expressed are subject to change without notice and may differ or be contrary to the opinions or recommendations of ParityFX. Unless stated specifically otherwise, this is not a recommendation, offer or solicitation to buy or sell and any prices or quotations contained herein are indicative only. To the extent permitted by law, ParityFX does not accept any liability arising from the use of this communication.
Follow our tweets @parityfxplc
Follow us on LinkedIn ParityFX Plc