Euro Exchange Rate Strength Could be Targeted by the ECB this Thursday

Euro Exchange Rate Strength Could be Targeted by the ECB this Thursday

4 April 2016, 14:56
Vasilii Apostolidi
This Thursday we get the “accounts” of the March European Central Bank meeting and Bank of America Merrill Lynch warn that the strengthening euro could be targeted.
The topic of central banks fighting their rising currencies has picked up as we head into the second quarter.

Of note, questions are being asked as to whether the Reserve Bank of Australia and Reserve Bank of New Zealand will sit back and watch their currencies continue to rise.

And it is not just the strength of the antipodean currencies that will be in focus this month.

The euro exchange rate complex has risen notably since the ECB cut interest rates and boosted its quantitative easing programme in March.

We have reported that some in the analyst community argue the euro’s strength is unlikely to be targeted by decision makers going forward as the focus for the Bank has shifted decisively to increasing lending as a solid demand for credit by Eurozone businesses has become increasingly apparent.

Any side effects, that include a higher euro, are arguably secondary.

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 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 accounts as another occasion 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.

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.

“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.

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