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Euro Deflation? What's to Worry.

Posted by Joseph Trevisani on Mar 10, 2014 5:57:00 PM

The euro opened in New York at 1.3874 near the bottom of its 1.3868-1.3898 Asian and European ranges.  Traders made one concerted run at 1.3900 about two hours after the London open, but after failing before 1.3900 the currency closed at 1.3977 much as it did on Friday at 1.3875 after the 1.3915 top.

A comment from Christian Noyer, Governor of the Bank of Austria and ECB board member that a stronger euro was deflationary had no impact on the surging European currency.   “When the euro tends to strengthen, it creates additional downward pressure on the economy and inflation, which in both cases isn’t warranted. So we’re not happy at the moment.”

Euro zone inflation was 0.8 percent for the year ending in January. This was just one-tenth above the median forecast and October's record non-recessionary low of 0.7 percent. Inflation has been falling steadily for more than two years. 

Although the ECB declined to act last week on interest rates or any of the other proposals it has publically discussed to counter defaltion any, retreat in inflation will bring the discussin to the fore again. February EMU inflation figureswill be released next Monday , the 17th.

Cross demand after the open brought the euro to 1.3887 but orders in front of 1.3900 quickly squelched upward momentum and additional pressure came from losses on European bourses.

The euro found enough support at 1.3875 to prompt another quick aborted run to 1.3887. This failure dropped the euro to 1.3868, following a note from the German DIW Institute calling for a large scale quantitative easing program of 60 billion euros a month to avoid deflation.

Afternoon trading was very subdued and a brief rally to 1.3875 petered out on the news that the head for the Central Bank of Cyprus Governor Demetriades had resigned, blaming friction with the Board of Directorsand which sank the euro to its daily low of 1.3862.  Further euro cross demand helped lift the pair back to 1.3882. Yet another deflation warning from the IMF's chief economist  Olivier Blanchard was ignored and the pair remained very stable trading in the late afternoon trading between 1.3868  and 1.387, closing at 1.3877.

 

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Chart: Bloomberg

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