New ECB actions were specifically intended to reap benefits through Euro currency devaluation. To achieve this aim, Draghi announced cuts in interest rates as well as administering Euro ‘printing’ through balance sheet expansion (1,000bln or so). The ECB has had recent success as the EUR/USD dropped over 1.5% today and has fallen 5% since July.
A weaker currency is desirable during periods of recessions and subdued inflation. Doing so, however, is not always seamless or the most ideal policy. Many global central banks, for instance, needed to follow the Fed’s lead in cutting rates after the 2008 crisis or risked having an undesirable appreciation of their home currency. Tensions can periodically arise, because two countries cannot become ‘more competitive’ at the same time (‘a race to the bottom’). Clearly, a weaker currency in one country means a stronger currency in another.
There are times, however, when currency movements are mutually beneficial. Against the USD, Draghi is maximizing his efforts to weaken the Euro by trying to utilize ideal timing; expanding the ECB balance sheet at precisely the same time that the Fed’s is flat lining. The widening of interest rate differentials also helps. The FOMC likely welcomes today’s actions. Ideally, Draghi would have also wanted a Quid Quo Pro with Italy and France regarding economic reform; this sounds good in theory, but it is not how politics work.
Despite Draghi’s vacant pleas for fiscal ‘arrows’, he had to ‘do his part’, particularly after backing himself into a corner after his Jackson Hole speech. Nonetheless, ECB actions surpassed expectations today. However, this probably means that the bazooka of sovereign QE is off the table for a while.
This post was published at Zero Hedge on 09/04/2014.