Thursday, November 6, 2014

Draghi: “We go back to ECB 2012 Balance Sheet” | Non-Farm payrolls are later today – they had better be good

The Euro is looking at the 1.25 US dollar exchange rate level through its rear-view mirror this morning. The latest precipitate fall started at the precise moment when Mario Draghi, in his press conference following the ECB monetary policy statement yesterday, mentioned that the ECB Balance Sheet could be returning to the levels it was at in 2012.

This can only mean one thing: the European central bank is considering purchasing government bonds. This will have the effect of placing a lot more money in circulation in an effort to grow inflation. As always, rising inflation means a lower exchange rate.

In an interesting piece in The Economist (The ECB should stop fearing the Germans)  Paul de Grauwe of the London School of Economics gives the background to the divergence of economic policy as between the Federal Reserve in the US and the ECB in Europe. Up to 2012 both monetary authorities expanded their balance sheets (bought bonds) in pretty much the same way. Then the ECB changed tack and started on its austerity phase, which has lasted until now. The US accelerated its easing efforts. De Grauwe claims that the Americans were right and the Eurozone was wrong. The Single Currency bloc acted, according to him, at the behest of German ideology in this matter (he calls it ‘religious zeal in Germany’, which is a bit strong, but you get the picture).

Now all that, apparently, is about to change. It is late in the day, after the US has effectively started tightening, but better late than never.

So farewell, then, high value Euro against the US dollar.

Non-Farm payrolls today – they had better be good

Later today we will have the release of the Non Farm payrolls report in the USA. This is often a time of extreme short-term volatility in the Forex markets and today promises to be no exception.

The US dollar is on a tear, equities are on the up again and all sorts of commodities, but especially the hard ones such as oil, Iron Ore and gold, are heading south in a big way.

But the payroll figures today had better be good. There is such a sense of euphoria about the US economy, especially after the Republican Party successes in the recent mid-term elections, that any figure for payrolls that does not exceed, and comfortably exceed, 200k, could lead to a selloff of the US currency.

We need to be careful out there.

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