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When Is The Euro 'Volatile?' When It's Too Strong

Posted by Joseph Trevisani on Sep 7, 2017 3:20:34 PM

The European Central Bank left its main refinancing rate unchanged on Thursday as expected and deferred a decision on its bond buying program until its next meeting in  October. 

Currency fireworks began with ECB President Mario Draghi's news conference at 8:30 am New York time, 45 minutes after the policy statement. 

The euro initially lost about 30 points against the dollar to 1.1930 then jumped 1.1 percent in the next thirty minutes topping at 1.2059, its highest since January 2015.  By 2:30 pm in New York the euro was trading at 1.2001, 0.9 percent above yesterday's cl;ose. 

eur sept 7.png

The catalyst for the sharp advance was Mr. Draghi's comments on the euro exchange rate , "The recent volatility in the exchange rate represents a source of uncertainty which requires monitoring.”  In response to a question on policy timing for the bank's bond purchase program he noted that the decisions are  “many, complex, and always naturally one thinks about risks that may materialize in the coming weeks or months, so that is the caution behind not specifying a date -- probably the bulk of these decisions will be taken in October.”   

Mr. Draghi then said that the central bank was monitoring the euro's rise as it considers future policy. 

The euro has gained 15 percent against the dollar this year since closing at 1.0446 on January 2nd. 

eur daily sept 7.png

For the ECB the currency problem is straightfoward. The market assumes that the next move by the Board of Governors will be to curtail or end its quantitative easing bond purchases. These have  already totaled 2 trillion euros ($2.4 trillion) and are set to continue at $60 billon euros a month until the end of the year

With economic growth "solid" according to Mr Draghi-- the bank raised its GDP predictions  for this year and the next two on Thursday-- but inflation predicted to be just 1.2 percent next year and 1.5 percent in 2019, well below the bank's 2 percent target, any further strength in the euro will exert downward pressure on consumer prices, the opposite of what policy makers hope to achieve.   

The euro's surge has come despite the Federal Reserve's own tightening policy.  The U.S. central bank has  increased the Fed Funds rate four times in the last two years to 1.25 percent even as the ECB has kept its main refinancing rate at zero, bought 2 trillion euros worth of national and commercial securities. and helped to drive  sovereign bond rates for  several eurozone countries below zero. 

Mr. Draghi's complaint about currency volatility will likely become commonplace in the month's ahead as the ECB phases out its bond program. 

Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

Charts: WWM Alpha Trader

 

 

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