Friday 4 December 2015

Super Mario shocks the market with Hawkish Tone

In an amazing turn of events, ECB governor Mario Draghi announced an extension of the existing quantitative easing program that takes it out to March 2017 and a drop in the deposit rate from -0.2% to -0.3%. This seemingly didn't meet up to the expectations of most who had expected deeper cuts to the deposit rate and a longer timeframe to the stimulus and subsequently drove the euro versus major currency pairs to the highest in months.

If one looks at the longer term charts of the EURUSD they would see that there was quite a lot riding on the outcome and promises made by Draghi were priced in over and above what they should have but nonetheless, it doesn't change the fact that the US remains set to lift interest rates for the first time in almost 10 years as time is drawing nearer to the FOMC meeting.

Reading the article below, I tend to agree with the writer in that as much as the world has come to think as Europe as a problem child there are some positives coming out that may be missed out because of the overwhelming negative sentiment given to the trouble trading bloc.

I think it was prudent of Draghi to hold his cards close to his chest and only extend his measures in smaller increments as he doesn't want to exert his organization's economic influence to the extreme with the eventual product being a dysfunctional economy.

I wrote a blog a few weeks back (Negative interest rates won't help mend a broken economy) highlighting the market's obsession with free money and how EU politicians have become accustomed in their reliance of the monetary policy to make up for the loss of proper economic policy that would save the eurozone from it demise while the bickering over political ideologies burns on.

If we consider these points we could assume that Draghi himself is subtly throwing the suggestion that EU governments need to get their own house in order instead of their constant bombardment on the ECB for solutions to their problems and rightly so given that the EU monetary policy is at extremes never been tested which could spell further disaster if nothing is done.

Draghi knows very well of the the uphill battle that lies ahead after the showdown between Greece bailout lenders forced him to be more accommodative to Athens to reassure the market that everything will be done to ensure the longevity of the eurozone.However he knows the risk would clearly put a dent in EU leaders plans if and should more defiance as we saw in Greece were to descend in other EU nations such as Spain and Portugal.

If anything I believe the Euro will continue to lose ground against the Dollar simply based on the differences in monetary policies dictates it but the fact remains to be seen if this move pulled by Draghi will exert EU leaders into action and fix their economies.      
Dollar takes a pounding after Draghi strikes a hawkish tone

 Following on from the commentary above, as a result of Draghi's hawkish tone the Dollar came in for a hard landing as the move surprised many who had thought all but certainty in their views. The Dollar has been trending nicely over the past 3 months so a brief pause in trend wouldn't be out the ordinary which I think may continue into the end of the first quarter of 2016.

The debate after the rates have risen will be the pace at which the Fed sets in lifting rates and I am of the belief that I don't see a strong enough case to rise them in quick succession as the US economy is quite weak compared to other occasions.
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