Senor Draghi has joined the jawboning club | A sustained Euro fall will need ECB action

At his press conference last Thursday, the leader of the European Central Bank had more to say about the value of the Single Currency than has been the case during all of this other press meetings put together. His key comment was to the effect that

'The fundamentals for a weaker exchange rate are today much better than they were two or three months ago”.

He also pointed to the well perceived notion in the market place that monetary policy in the US and the EU are on a divergent path, and that this situation will pertain for some time to come. In other words, the US Federal Reserve is expected to do the job of weakening the Euro against its most important global counterpart, the US dollar.

Mr. Draghi is obviously encouraged by the effect of his words, that the ECB would “do whatever it takes”, in his corresponding statement in May of this year, when the Euro did begin to weaken as a result.

In all of this he is joining the many other Central Bankers who have decided to rely on words alone to bring about a depreciation of a currency, the strength of which has the capacity to derail the nascent economic recovery in their jurisdictions. But this has proved to be an unreliable tool in the fight against the many investors who are either looking for a safe haven for their money or are chasing yield in the Carry Trade and the bond markets.

A sustained Euro fall will need ECB action

In late 2011 the Swiss Central Bank felt it necessary to place a cap on the Swiss franc rate against the Euro, after repeated efforts to reduce its value in the face of economic flows into the country by investors in search of risk reduction for their cash holdings. To enforce this cap, the Swiss have been prepared to enter the Forex market and spend vast amounts in buying Euros against the Swiss unit whenever the rate is seen to be falling towards 1.20 to the Euro ( a fall in EURCHF implies a strengthening of the Swiss franc).

We have often written here about the “jawboning” that has been indulged in by the Australian Central Bank governor, Glenn Stevens, in the same cause, so far to little practical effect. Only in New Zealand has the currency fallen after a Central Bank statement, but we are convinced that this required intervention in the market at the same time, by the RBNZ.

The ECB is not above intervening in the market either, as they proved during the crisis related to peripheral countries’ sovereign bonds, when their efforts were directed at supporting the Single Currency.

But action, rather than just words, is still the best way to ensure a reduction in value for the Euro. The ECB has the means for this at its disposal in the form of the purchase of asset backed securities in the Eurozone, which is a form of Quantitative Easing.

We will have further indications of whether or not this is on the cards this coming Thursday when both Eurozone inflation figures and Eurozone GDP for the last twelve months will be announced, both at 9:30 GMT.