EUR Weaker: Beware Of ECB This Weekend
Do Not Forget ECB And Draghi This Weekend
Not many people have realized that the ECB is about to have its own version of the Fed's Jackson Hole forum this weekend.
It will start on Sunday May 27th and will end next Tuesday May 29th. This will be an annual Forum on Central Banking and will include government officials, central bank governors, academics, journalists and financial market representatives, exchanging views on current policy issues. The first such forum will take place in Sintra, Portugal, Sunday-Tuesday.
Draghi will give the welcoming address on Sunday evening and an introductory speech on Monday morning. He will also speak in the closing event on Tuesday afternoon.
The previous Fed Chairman Ben Bernanke did use the Jackson Hole Forum in the past to flag policy changes (such as QE2 in 2010).
Is it possible that Draghi could do the same, particularly if he wants to make the first Forum an event to remember?
The majority of the market expects some kind of easing from the ECB on June 5th. Dealers are focusing on the potential for the central bank's first dip into a negative deposit rate.The move is expected to penalize banks for "parking their excess cash" with the ECB. The potential knock on effect is to make EUR-dominated deposits less attractive, again weakening the exchange rate.
To date, most of the EUR's appreciation this year has to do with investor's confidence returning towards the Euro-zone. The market has been an avid buyer of European assets - particularly Euro-periphery bonds. Further monetary easing could be seen "as addressing the problem of fragmentation, and would actually improve the prospects for the peripheries." This could lead to further buying of Euro-assets and support the EUR.
This weekends ECB soiree could be a game changer. Depending on how open and aggressive Draghi will be, throw in the holiday Monday on either side of the Atlantic could give us some volatility. Lack of liquidity will make some of the currency moves very interesting. Expect the SNB (EUR/CHF 1.2215) and the BoJ (USD/JPY 101.77) to be watching intently.
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It's not a big surprise to see Capital Markets trying to consolidate as we head into a long weekend either side of the Atlantic. Caution ahead of Euro election results is keeping the European markets, particularly equities, in a holding pattern. Anti-European Union parties are expected to put in a good performance at a time when member's economic recovery remains relatively fragile. The lethargic reaction can also been seen in the bond market. So far, this asset class is showing a muted response to Spanish and Greek credit ratings being raised by the S&P and Fitch agencies. However, in currencies, the Euros 18-member single unit is keeping the market somewhat interested, especially as their currency has intentions to leak further beyond this morning three-month low outright print against the dollar (€1.3622).
The common currency has been on a weakening binge ever since the ECB hinted that further easing could be on the way next month. Certainly giving a helping hand this morning is the disappointing German Ifo business climate print for May. It has come in weaker than expected with a reading of 110.4 compared to expectations for 110.9 and 111.2 previously. With all three components of the German survey missing their marks is pushing the EUR lower. The breakdown shows weakness in both current conditions as well as expectations. No surprise that the Ukraine crisis is behind the drop in sentiment.
Despite a lull seen in the German economy in May, the underlying momentum of "booming" Germany is very positive. Nevertheless, the worry for Europe, without more vigorous growth from its largest member, the euro-zone will struggle to improve from the last quarters meager +0.2% growth from the prior quarter or +0.8% on an annualized pace. This morning's print is perhaps signaling a note of caution for Germany. Despite the German economy being in a league of its own, no one economy is "invulnerable forever." Even as the economy continues to deal well with relatively strong EUR, lower ECB rates would probably not help impetus for the German economy. But, with German optimism waning may help the case for ECB easing in June.
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