Today is the day when once again the stage will be set and all lights will be on and the person who will be under them will be the president of the ECB- Mr Draghi. Many investors have been touting that perhaps the recent comments of the ECB member- Ewald Nowotny, were a hint that today another round of quantitative easing will be announced. His comments brought a tornado to the euro rally and the currency has not been able to gain the 1.15 ground against the dollar since then, which it almost did before he sentenced the euro. Investors certainly have priced some sort of quantitative news, but only if these matters were that easy! Mr. Draghi has to go to war with Germany and he had to use every single weapon before he saved his most famous quote “What Ever It Takes” which saved the euro during the peak of the financial crisis.
A Quick Look Back
Let’s cast our mind over the period of the third quarter and see how much the situation has changed in black and white i.e. in terms of economic data for the euro zone. We do know that the Q2 GDP growth was revised up which is a positive sign for the euro. Secondly, the industrial production number for the eurozone since the start of the third quarter till the end of August have shown improvement. Thirdly, most of the PMI economic surveys have shown no change, especially the Core and services PMI. The core CPI reading for the eurozone wasn’t impacted either, but yes, it is true that the headline inflation number had a stark strain of lower oil price. Fourthly, the unemployment picture has not become more worse if not better. Finally, the credit lending has shown more sign of life as the demand and lending criteria have become more favourable. Although, it is uneven as Spain and Italy are leading when it comes to credit lending element and France on the other hand, has tightened the lending criteria.
Challenges Remain
However, challenges remain monumental and the ECB is no where close enough to achieve its target. Inflation, growth and unemployment are all well off their boundaries. The abate Chinese growth, uncertainty about when the Fed will increase the rate and the blood bath in the emerging markets are just few reasons which has brought more obstacle in the policy maker’s path. The pity element is that none of these are within the control of the ECB, but somehow, they will still get the blame for not achieving their results. The ice topping was done recently by the Volkswagen (DE:VOWG) scandal in Germany which has made peeled investor’s confidence off.
Who is Losing Steam
Germany is without any doubt is the biggest economy of the eurozone and also know as the economic engine. The economic growth has started to turn around very rapidly as its industrial and factory orders have taken a massive toll in the recent month. Moreover, we have a large number of migrants coming to Germany, which the government has played very intelligently, but in the short term it will impact its economic figure.
Mr Draghi can use all these excuses to take Germany on the ropes once again and will announce more QE, but that day is not today. He perhaps wants to wait for another while and see more of the economic data prints, let the Fed rate hike situation played out, and finally wait for the end results on emerging markets after the Fed has raised the rate.
So What Draghi Will Say?
So, the question is what he will say which could appear that he is punching above his weight? There are a number of ways by which he can do that and the end result could be weakness for the euro against the dollar and other major currencies.
Firstly, he will maintain his rhetoric dovish tone and may emphasise on the fact that the ECB is till far from achieving their target and this will show that the bank is maintaining its stance. Finally, he will have to communicate and telegraph their path of further easing very clearly. The bank has many different options how they can inflate their balance sheet. The option A is that they can extend their putative deadline. Option B is that they can always load more gun powder- start buying more but what they can buy and how much is left out there to buy is another question. This will make the bank to add more instruments in their list. Finally, the bank could always talk about lowering the interest further which open the room to add more instrument.
Disclosure & Disclaimer: The above is for informational purposes only and NOT to be construed as specific trading advice. responsibility for trade decisions is solely with the reader.
by Naeem Aslam