Beware, Recent Euro Exchange Rate Strength Could be Addressed by the ECB this Thursday
A new risk lies on the horizon for those betting on a higher euro - the release of the European Central Bank's minutes from their March meeting.
The euro exchange rate complex has risen notably since the ECB cut interest rates and boosted its quantitative easing programme in March, defying the long-held wishes of policy makers to see a persistently weak currency.
Some in the analyst community argue the euro’s strength actually no longer really matters to policy makers as the focus of the Bank shifts to increasing lending to meet the demand for credit by Eurozone businesses.
Any side effects, that include a higher euro, are arguably now secondary to the ECB in the view of these analysts.
However, the issue of central banks fighting their rising currencies is becoming a more prominent one as we head into the second quarter of 2016.
Of note, questions are being asked as to whether the Reserve Bank of Australia (RBA) and Reserve Bank of New Zealand will sit back and watch their currencies continue to rise.
We have already seen the RBA speak up about the strength in the Aussie dollar at their April rate meeting; and be warned that it is not just the strength of the antipodean currencies that will be in focus this month.
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Beware: The ECB May Still Want a Weaker Euro
On Thursday markets will chew over the publication of the 'accounts' of the monetary policy meeting of the Governing Council held on 10 March 2016.
It is suggested that the ECB may use the occassion to take on board market movements since the meeting and send a powerful collective signal to correct such movements if required.
“Given the strengthening Euro, which is now back above $1.14 for the first time since October, we would not be surprised if the minutes had a slightly dovish tone with respect to future rate cuts,” says analyst Gilles Moec at Bank of America Merrill Lynch Global Research.
Remember that $1.15 was the key level last year that saw a raft of ECB speakers talk down the Euro on a number of occasions.
"After another brief flirtation above 1.14 we have seen the EUR retreat in the wake of comments from ECB Governing Council member and Chief Economist Peter Praet. While the central bank may have adapted their policy aim last month, to target credit, the market has been reminded once again that the bank will continue to act ‘forcefully’ to counter deflationary tendencies," says Jeremy Stretch at CIBC in London.
Therefore we could well get a decisive answer as to whether the euro's strength is regarded as a negative development.
If the exchange rate is mentioned, be assured it will be within a negative context and this presents a risk to the currency this week.
"In the light of net EUR shorts being pared over the last two weeks we would regard the recent EUR USD rally as taking us towards rather over bought territory," says Stretch.
Effectiveness of Bond Purchases Also Key
“Related to this, it will be interesting to pay attention to any discussion on the US outlook and the implications for the divergence of monetary policies across both sides of the Atlantic,” says Moec.
With few official details available on the actual implementation of corporate bond purchases, the minutes may provide some early information on the Corporate Sector Purchase Programme (CSPP) and, potentially more importantly, the confidence of the ECB to buy sufficient amounts of such bonds.
“Bear in mind that our credit strategists believe the ECB are likely to be able to purchase just €3-5bn of corporate bonds per month, despite some sources suggesting a figure as high as €20bn/month,” says Moec.
The success, or otherwise, of the CSPP will be another variable for currency traders to dodge.
