Euro weakness sparks analyst clash over currency war

Paris (AFP) – The euro’s slide against the dollar has reignited talk of a “currency war”, with analysts in opposing camps over whether or not countries are consciously playing with their exchange rates.

War language is no stranger to modern monetary policy.

The massive bond buying programmes, or quantitative easing (QE), that central banks have used in response to the financial and economic crises that have rocked the global economy since 2008 are often referred to as a bazooka.

After lowering interest rates, sometimes to zero or even into negative territory, major central banks turned to buying government and corporate bonds to stimulate the economy.

First tried by Japan in 2001 to combat deflation, the US Federal Reserve began using it in 2008 to respond to the financial market crisis and pull the US economy out of recession.

Japan used QE with more success in 2013 after Shinzo Abe came to power, and the European Central Bank joined the party in March.

– Monetary policy bazooka –

But central banks fired this bazooka as governments had little they could do.

“We are really in a situation where monetary policy has substituted for budgetary policy” as “the governments don’t have any more budgetary margin for maneouvre,” said Saxo Banque economist Christopher Dembik.

And the bazooka wasn’t directly aimed at exchange rates.

The bond purchases inject money into the economy, thus addressing any concerns about market liquidity. To the extent the funds result in new investments in the real economy it stimulates growth, another aim of QE policies.

But some funds end up leaving the country as investors seek better returns elsewhere. This pushes the value of the currency down, which is also not an unwelcome effect for policymakers as this favours more exports of goods and services and thus growth.

“The currency weapon is rarely the official objective,” said Patrick Jacq, a bonds specialist at BNP Paribas bank.

Led by Brazil, developing countries charged that the US QE programme was a first shot in a currency war because their economies suffered as exports slumped thanks to the weak dollar.

Those complaints were brushed aside with commitments by the leading economies to “market-determined exchange rates”.

But public comments from elected officials about currency values often muddy the waters about policy objectives, even if central banks in most major economies are independent.

Lowering a currency’s value may not be the stated policy objective “but they are thinking it so loudly all the world hears it,” said Rene Desfossez, a bonds specialist at Natixis investment bank.

The reason is clear as “the exchange rate is one of the principle levers on which they can use to make monetary policy as favourable as possible for economic recovery”.

A weak currency can provide a boost to exports, and thus contribute to a wider economic recovery if companies raise wages and create new jobs.

– Policy free for all –

And UniCredit’s global chief economist, Erik Nielsen, observed recently that days of “gentlemanly” cooperation between central banks is long gone.

“I am not in the ‘currency war’ camp, but it is important to note that the world’s leading central bankers are now making it explicitly clear that they run monetary policy for their own country only,” he said in a note to clients.

“And while the currency is not an explicit objective in their policy set-up, the FX is seen — and explicitly referred to — as an integral part of creating the desired financial conditions for the domestic economies.”

More countries have been joining on the easing bandwagon, either on their own initiative or in response to others.

The Organisation for Economic Cooperation and Development noted recently that monetary policy in countries accounting for roughly half of global output had been eased in the past few months.

– ‘Not necessarily warfare’ –

But is it a currency war?

Editors at Bloomberg recently wrote that “this isn’t necessarily warfare”.

The eurozone, Japan and China all have ample justification for monetary stimulus, they noted.

One way of uncovering unfair currency manipulation, Bloomberg editors said, is to look at foreign reserves, which should increase if a country is deliberately buying foreign currency to keep the value of its currency low.

But no major country has been massively hoarding foreign reserves, according to Bloomberg data.

The massive swings in currencies in recent months — the dollar has appreciated by a quarter against a basket of major currencies since August — may be due more to monetary and economic dissonance.

While the eurozone and much of the rest of the world are easing monetary policy, the United States is on the cusp of raising interest rates from the zero level where they have been for more than six years.

The prospect of higher returns on US bonds caused a brief stampede out of emerging markets last year, and with much of eurozone debt now providing little if no return, the euro has been slumping against the greenback.

“As we have said for over a year now, the divergence in central bank policies is crucial to where these currencies move now,” said Greg Smith, an analyst at currency trading firm World First.

Project Syndicate: How far will the euro fall?

LONDON (Project Syndicate) — The U.S. dollar is hitting new 12-year highs almost daily DXY, -1.28%  , while the euro EURUSD, +1.50%  seems to be plunging inexorably to below dollar parity. Currency movements are often described as the most unpredictable of all financial variables. But recent events in foreign-exchange markets seem, for once, to have a fairly obvious explanation — one that almost all economists and policy makers accept and endorse.

French President François Hollande, for one, has ecstatically welcomed the plunging euro: “It makes things nice and clear: one euro equals a dollar,” he told an audience of industrialists. But it is when things seem “nice and clear” that investors should question conventional wisdom. A strong dollar and a weak euro is certainly the most popular bet of 2015. So is there a chance that the exchange-rate trend may already be overshooting?

Also read: The dollar’s meteoric rise may be just about over

In one sense, the conventional explanation of the recent euro-dollar movement is surely right. The main driving force clearly has been monetary divergence, with the Federal Reserve tightening policy and the European Central Bank maintaining rock-bottom interest rates and launching quantitative easing. But how much of this divergence is already priced in? The answer depends on how many people either are unaware of the interest-rate spread or do not believe that it will widen very far.

Last year, many investors questioned the ECB’s ability to launch a bond-buying program in the face of German opposition, and many others doubted the Fed’s willingness to tighten monetary policy, because doing so could choke off the U.S. economic recovery. That is why the euro was still worth almost $ 1.40 a year ago — and why I and others expected the euro to fall a long way against the dollar.

But the scope for dollar-bullish or euro-bearish surprises is much narrower today. Does anyone still believe that the U.S. economy is on the brink of recession? Or that the Bundesbank has the power to overrule ECB President Mario Draghi’s policy decisions?

With so much of the monetary divergence now discounted, perhaps we should focus more attention on the other factors that could influence currency movements in the months ahead.

On the side of a stronger dollar and weaker euro, there seem to be three possibilities.

One is that the Fed could raise interest rates substantially faster than expected. Another is that investors and corporate treasurers could become increasingly confident and aggressive in borrowing euros to convert into dollars and take advantage of higher U.S. rates. Finally, Asian and Middle Eastern central banks or sovereign wealth funds could take advantage of the ECB’s bond-purchase program to sell increasing proportions of their German, French, or Italian debt and reinvest the proceeds in higher-yielding U.S. Treasury securities.

Neil King: The Rocky Political Path for a Trade Deal

A free-trade bill was supposed to be one area of agreement between the White House and the new Republican congress. But WSJ Global Economics Editor Neil King explains why it now looks to be in trouble. Photo: AP

These are all plausible scenarios. But at least four factors could push the dollar-euro exchange rate the other way.

First, there is the effect of the strong dollar itself on the U.S. economy and its monetary policy. If the dollar continues to rise, U.S. economic activity and inflation will weaken. In that case, the Fed, instead of raising interest rates faster than expected, will probably become more dovish.

The Euro's Going Down. If It Doesn't Go Up.

The euro will be at $ 0.80 by the end of 2017, losing a quarter of its value from current levels and setting new lows, say Goldman Sachs analysts.

No it won’t. The euro will appreciate around 15% to $ 1.20 over the same period, say HSBC’s economists.

These forecasts may be at opposite extremes of the current consensus, which is broadly for more euro weakness from $ 1.06 where it trades now. But they’re both built on solid arguments. Which to believe depends on what your outlook is for how the global economy shapes up.

The Goldman Sachs view is based on expectations that U.S. monetary policy will start to normalize, which is to say the Federal Reserve will at long last raise its key interest rate from the current near-zero levels as the U.S. economy recovers. At the same time that the Fed tightens, the European Central Bank is keeping monetary policy on full throttle. This will cause investors to shift cash from eurozone assets and across the Atlantic.

And though everyone is talking about the strong dollar, the currency is actually “underpositioned,” according to a recent Goldman note, which is to say the money flows haven’t kept pace with the prevalent views.

What’s more, a eurozone recovery won’t initially be good news for the currency, according to the note. Economic strength will see a pickup in domestic demand, which will weaken the region’s current account position and thus tend to push the currency downward.

That doesn’t mean an 80 cent euro is fair value. But history has shown that foreign exchange markets are more volatile than simple models suggest they ought to be. Economists argue that’s because financial markets move faster than the real economy–prices of goods and trade flows–which leads currencies to fall well below their fair value until assets priced in that currency show compelling value.

Indeed, the Goldman analysts estimate the euro’s fair value to be around $ 1.20.

Which, intriguingly, is where the HSBC economists put the euro-dollar exchange rate in around two-and-a-half years’ time.

Their argument is that the dollar’s gains have gone far enough. Excluding monster dollar rallies of the early 1980s and another one in the run up to the end of the millennium, the current surge is substantially bigger than the usual run-of-the-mill dollar surge, having gained a quarter in value since last summer. As a result, HSBC figures the dollar is now one of the world’s most overvalued currencies, second only to the Swiss franc.

The markets have priced in divergent monetary policy paths on the two sides of the Atlantic. The result is that dollar bullishness has become the consensus trade.

But now the strong dollar seems to be taking a bite out of the U.S. economy while the eurozone has been picking up. Whereas U.S. data have consistently surprised on the downside during the past six months or so, Europe’s have surprised on the up.

The Fed has been taking an increasing interest in the dollar’s appreciation. Although the U.S. is a relatively closed econom — so the exchange rate tends to have less impact on domestic fundamentals than it does in, say, the U.K. — the strong dollar has started to eat into the earnings of the U.S.’s multinationals. So far, this hasn’t registered in the jobs numbers. But employment is a lagging indicator and is one of the few points of recent strength in the U.S. economy.

Meanwhile, the rising dollar has put downward pressure on commodity prices, which, in turn, has pushed U.S. inflation down as well. All of which suggests Fed policy will remain accommodative for longer than the consensus expects. And what’s bearish for the dollar will be bullish for the euro. That’s not to say the euro might not weaken further over the near term. But the turning point is near, according to the HSBC analysts.

Who’s right? Foreign exchange markets are notoriously difficult to call. But both euro bulls and bears have strong arguments to fall back on.

Euro Rebounds on Upbeat Data –Upate

By Josie Cox

A solid run of European data supported the euro on Monday.

Early in the day, the currency took a hit from the buoyant dollar, which climbed close to an 11-year high against a number of major currencies after Beijing’s decision over the weekend to cut interest rates for the second time in less than four months, highlighting the gap in interest-rate policy between the U.S. and the rest of the world.

But the euro later recovered, climbing by 0.3% against the buck to $ 1.1230 after figures from data provider Markit showed that the eurozone purchasing manufacturer’s index was 51.0 for February, holding steady from an initial reading. The region’s jobless rate, meanwhile, fell to its lowest level since early 2012.

“In our view, a weaker euro, lower oil prices, a better economic environment and accommodative monetary policy should support confidence in the coming months,” Barclays economist Apolline Menut wrote.

China’s central bank lowered the country’s benchmark one-year loan rate and one-year deposit rate by a quarter of a percentage point to 5.35% and 2.5%, respectively.

The central bank singled out rising deflationary pressure as a trigger for its action, saying that plunging commodity prices world-wide “provided room” to spur growth by lowering interest rates.

China now joins countries in the eurozone and Japan in easing monetary policies due to deflationary pressure, while the U.S. Federal Reserve is moving toward raising interest rates as America’s economy recovers.

“The feed-through to risk taking [in response to the Chinese rate cut] by the markets at the start of the week has been limited,” noted analysts at BNP Paribas. Even the Australian dollar, which typically climbs on shifts to easier monetary policy in China because of the two countries’ close trading links, didn’t rally.

Elsewhere, Russian markets shrugged off news that opposition leader and outspoken critic of the government Boris Nemtsov was gunned down on a bridge next to the Kremlin late Friday.

The ruble, which has now tumbled close to 40% over the last six months against the dollar, burdened by Western sanctions and geopolitical turmoil, was trading a modest 2% lower against the greenback on Monday. One dollar now fetches just over 62 rubles.

Some analysts warned of the long-term risks of investing in Russia. But many were more sanguine. “I don’t think that even a figure like Mr. Nemtsov could be a real threat to [Russian President Vladimir] Putin, so this doesn’t really change the political landscape,” said Viktor Szabo, senior investment manager at Aberdeen Asset Management.

“We still think that fundamentally Russia isn’t a ‘junk’ country. It has the means to service its debt and has displayed sensible crisis management,” he added.

Russia’s Micex stock index traded 1.5% higher, according to the Moscow Exchange’s website midmorning Monday, while the dollar-denominated RTS Index was 1.1% higher on the day.

In commodity markets, Brent crude suffered a fresh slide to trade 1.1% lower on the day at $ 61.92 per barrel. Gold was 0.3% higher at around $ 1,216 per troy ounce. The S&P 500 in the U.S. was indicated opening 0.1% higher at 2,105. Futures, however, don’t necessarily reflect moves after the opening bell.

Write to Josie Cox at [email protected]

    (END) Dow Jones Newswires   03-02-150743ET   Copyright (c) 2015 Dow Jones & Company, Inc. 

EUR/USD to Threaten Opening Monthly Range on Strong Euro-Zone 4Q GDP –

Euro-Zone to Expand Another 0.2% in 4Q 2014.

Will ECB Keep the Door Open to Introduce More Non-Standard Measures?

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Trading the News: Euro-Zone Gross Domestic Product (GDP)

Another 0.2% expansion in the Euro-Zone’s Gross Domestic Product (GDP) may encourage the European Central Bank (ECB) to drop is dovish tone for monetary policy as the Governing Council anticipates its non-standard measures to boost economic activity.

What’s Expected:

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Why Is This Event Important:However, the ECB may have little choice but to further support the monetary union and introduce additional policy tools in 2015 as the governments operating under the single currency struggle to implement the structural changes to rebalance the economy.

Expectations: Bullish Argument/Scenario

Improved confidence paired with greater demand from home and abroad may generate a better-than-expected GDP print, and a pickup in economic activity may encourage a more meaningful rebound in EUR/USD as it raises the ECB’s scope to retain its current policy throughout 2015.

Risk: Bearish Argument/Scenario

Nevertheless, the ongoing slack across the euro-area may undermine expectations for more meaningful recovery, and the Governing Council may continue to endorse a dovish tone for monetary policy as it struggles to achieve its one and only mandate for price stability.

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How To Trade This Event Risk(Video)

Bullish EUR Trade: Euro-Zone Growth Rate Expands 0.2% or Greater

  • Need green, five-minute candle following a positive report to consider a long EUR/USD trade
  • If market reaction favors a bullish Euro trade, buy EUR/USD with two separate position
  • Set stop at the near-by swing low/reasonable distance from cost; at least 1:1 risk-to-reward
  • Move stop to entry on remaining position once initial target is met, set reasonable limit

Bearish EUR Trade: GDP Report Misses Market Expectations

  • Need red, five-minute candle to favor a short EUR/USD trade
  • Implement same strategy as the bullish euro trade, just in reverse

Read More:

GBPAUD – Trading At Dual Channel Resistance

USDOLLAR 2nd Large Outside Day Reversal This Month

Potential Price Targets For The Release


Chart – Created Using FXCM Marketscope 2.0

  • Keeping a close eye on the bearish RSI momentum, but the series of closes above the 1.1130 handle may generate a larger recovery in EUR/USD.
  • Interim Resistance: 1.1600 pivot to 1.6110 (61.8% expansion)
  • Interim Support: 1.1096 (2015 low) to 1.1100 pivot

Impact that Euro-Zone GDP has had on EUR/USD during the last quarter

3Q 2014 Euro-Zone Gross Domestic Product (GDP)

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The Euro-area economy grew a modest 0.2% in the third quarter of 2014, following a revised 0.1% expansion during the three-months through June. Despite the better-than-expected print, the European Central Bank (ECB) may come under pressure to further embark on its easing cycle and introduce a quantitative easing (QE) program as it struggles to achieve the 2% target for inflation. Beyond the limited market reaction, EUR/USD drifted towards the 1.2400 handle going into the North American trade, but the weakness was short-lived as the pair recovered to close at 1.2501.

— Written by David Song, Currency Analyst and Shuyang Ren

To contact David, e-mail [email protected] Follow me on Twitter at @DavidJSong.

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The Swiss Franc and The Tragedy of the Euro

Philipp Bagus, author of The Tragedy of the Euro recently spoke with the Mises Institute about recent developments in Switzerland and the European Monetary Union.

Mises Institute: In January, the Swiss central bank unpegged the franc from the euro. What does this mean for the future of the Swiss franc?

Philipp Bagus: The Swiss central bank admitted a huge and costly error by unpegging the franc from the euro. First, they chained the Swiss franc to the sinking ship that is the euro. Then, once they found themselves under water and half drowned, they decided to cut the chain. Moreover, the Swiss national bank endured important losses on euro-denominated investments. These losses, borne by all Swiss franc users, in a sense reflect the hidden subsidies given to the Swiss export industry in recent years. Now, the Swiss franc will likely appreciate compared to currencies that are being inflated, such as the euro.

MI: Why was the Swiss National Bank (SNB) chained to the euro in the first place?

PB: By establishing a fixed rate for the franc against the euro, the SNB had committed itself to follow the European Central Bank. So the ECB, managing the crisis of its own poorly constructed currency, was indirectly determining the Swiss monetary policy as well.

MI: Why do you describe the euro as a sinking ship?

PB: The euro is badly designed. There is one central banking system that can be used by a wide variety of governments to finance themselves. This is the tragedy of the euro: governments can finance their deficits indirectly through the central bank as their debts are pledged as collateral for loans to the banking system. Or they can be directly purchased by the central bank.

The effect of this policy is to externalize the costs of this monetization of the deficits on all users of the euro, some of them living in other countries. There is therefore an incentive in the euro countries to make deficits and accumulate debt, while externalizing costs on foreigners. They wanted to prevent this with the rules agreed upon within the Stability and Growth Pact, but no one feels bound by those anymore.

MI: Could this lead to the downfall of the euro?

PB: It has already led to an enormous debt for most countries. Add to that the expansionary monetary policy of the European Central Bank, which is always coming up with new tricks that put more money in circulation, such as their recently-announced quantitative easing.

As the number of euros increases, the value of each euro is diluted. The Swiss National Bank had decided to tie the franc to this depreciating currency, but apparently, by January, the Swiss had had enough.

MI: So does that mean we can now buy more goods with fewer francs?

PB: Well, you can buy fewer francs now than you could have when the franc was stronger. In a well-functioning economy, though, if you had economic growth and if people actually paid back their loans, the prices of goods would actually fall and people could buy more for their money. But, as it is, we do not benefit from strongly falling prices, because of this expansionary monetary policy. What we are experiencing with the falling gasoline prices or in the electronic goods sector, we could have witnessed in recent years in virtually all goods and services. But we didn´t. Thanks to central banks printing new money wildly.

MI: Who benefits from such a policy?

PB: You will benefit some players who get the newly created money first, and those who create the money themselves may benefit as well. These are people in the financial system, particularly banks, and within the state itself. Then, those who get the money first can shop with lots of new money, but at old prices. Then prices rise and the ordinary people can, for example, no longer afford real estate. The cost of living increases, but wages do not rise or not so fast as the cost of living. The benefits of economic growth are reaped mainly by the first recipients of the money and not by all.

MI: How does the state benefit?

PB: States can go further and further into debt thanks to this monetary policy, and they can further distribute the borrowed money to the civil servants and subsidized entrepreneurs. Because the initial recipients of paper money (i.e., the financial and banking sectors) benefit most from this, they are the ones who advocate it most loudly.

MI: How to correct such a monetary system?

PB: As long as you can create money by pushing some keys on a computer, nothing will change. We could simply add a zero to every franc and every euro. Then the money supply would be ten times greater, but we’d be no richer, because prices would also increase tenfold. Of course, the way monetary policy is done now is not like that. The new money is not injected equally to everyone in the economy by adding zeros to euros or francs. If it were done that way, no one would be interested in it anymore and no one would be shouting for more money printing.

To correct the system we need a money that cannot be produced by touching a key on a keyboard. As long as money can be produced at almost no cost, the temptation is great and the political pressure to do so is huge. We see this over and over in history.

MI: In what kind of system would this be possible?

PB: A system with full gold backing, is one example. Gold can not simply be created from scratch, you have to dig for it.

MI: How long will the paper money system last?

PB: If I knew that I could be very rich. It depends greatly on the monetary policy. And the financial and political elites will try to save the system because they benefit from it. They could try to reset the system. What is clear is that the debt held by so many states cannot grow much more. It is unlikely that you can pay back this debt through growth. Most countries are in a monetary trap. When interest rates rise, the states are bankrupt because they cannot pay the interest.

MI: How will the current system end?

PB: There are different ways and none of them are good for savers. Central banks could let the printing presses run faster and thus completely devalue the money. Then they could confiscate or tax away assets; a wealth tax as has been proposed by the International Monetary Fund. Or proceeding as in Cyprus, where there was a bail-in which bank creditors have been converted into shareholders. Or you take a haircut — the creditors must give up a large part of their claims. Or there is monetary reform. This is something like the reset button. You can then start all over again.

MI: Will new currencies emerge to replace the old ones?

PB: First of all, competition between currencies must be maintained, because people then can use the currency that they find most suitable for their purposes. A few currencies might then prevail. Gold or silver, and there might be even good electronic currencies such as Bitcoin. As a transition you could first, with the gold of the national bank, create a fully covered gold currency and then open up the market for other competitors.

MI: Is a gold standard a solution?

PB: I’m not fixated on the gold standard. In the competition between currencies, gold and other precious metals have historically proven to be good money. In 1914, governments nationalized our gold in Europe. After some back and forth the last bond to gold was abolished in the 1970s because it limited the governments in their spending orgies. Now we have a pure paper money system. We should set our monetary system back to the pre-1914 period. This time with a one-hundred-percent-backed gold standard — and open the competition in alternative currencies. Then people can choose freely. The big advantage is that these currencies are truly independent of politics. Gold cannot be politically manipulated. Un-manipulated money is better money than state money ever can be.

Image source: iStockphoto.

Euro Crosses to Target Multi-Year Lows on ECB Easing Cycle –

The growing deviation in monetary policy continues to foster a bearish outlook for EUR/GBP and EUR/CAD as the European Central Bank (ECB) struggles to achieve its one and only mandate for price stability. Nevertheless, the Bank of England (BoE) remains on track to raise the benchmark interest rate in 2015 as the central bank anticipates a faster recovery in the U.K, while the Bank of Canada (BoC) may come under increased pressure to further normalize monetary policy amid the stickiness in price growth.


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Euro Crosses to Target Multi-Year Lows on ECB Easing Cycle

EUR/GBP remains poised for a further decline in 2015 as it preserves the bearish trend carried over from back in 2009. We will continue to look for a series of lower highs & lows in EUR/GBP as BoE Governor Mark Carney prepares U.K. household and business for higher borrowing-costs while the ECB keeps the door open for additional monetary support. With that said, EUR/GBP may make a more meaningful run at the 2012 low (0.7750) in the year ahead, and we will continue to favor the downside targets in 2015 as the fundamentals and technicals point to a further decline in the exchange rate.


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Euro Crosses to Target Multi-Year Lows on ECB Easing Cycle

After carving a head-and-shoulders top in 2014, the key reversal in EUR/CAD should continue to take shape in 2015 as the Bank of Canada scales back its dovish tone for monetary policy. Indeed, the BoC may follow the Fed and show a greater willingness to raise the benchmark interest rate next year as inflation holds above the 2% target, and Governor Stephen Poloz may continue to change his tune over the near to medium-term as the central bank head sees a broadening recovery in Canada. With that said, we will continue to look for a series of lower highs & lows in EUR/CAD and favor the downside targets especially as the fundamental outlook for the euro-area remains clouded with high uncertainty.

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ECB's Constancio sees negative inflation rate

In early December the ECB had forecast 0.7 percent inflation for 2015 but Constancio told Germany’s WirtschaftsWoche oil prices had fallen by an extra 15 percent since then and that, while this should support growth and so drive up inflation in the longer term, it created a tricky situation in the short-term.

“We now expect a negative inflation rate in the coming months and that is something that every central bank has to look at very closely,” Constancio was quoted as saying in an interview due to be published on Monday.

But he said that several months of negative inflation would not translate into deflation: “You’d need negative inflation rates over a longer period for that. If it’s just a temporary phenomenon, I don’t see a danger.”

Read MoreAmazon falls? China rises? Extreme predictions for 2015

Constancio said the euro zone was not in deflation and there was also not a risk of this for every country in the single currency bloc. He added that rising productivity in countries like Ireland and Spain could, for example, create scope for wage rises, which would counter deflation dangers.

He said forecasts from the International Monetary Fund, the European Commission and OECD that the euro zone’s economic weakness would continue until 2018 meant there would be downward pressure on inflation until then.

By buying asset-backed securities (ABS), or bundled loans, which the ECB began doing on Nov. 21, as well as purchasing covered bonds and offering new loans to banks, the ECB aims to increase the size of its balance sheet back to levels seen in early 2012.

Constancio said there had been no decision on what extra measures the ECB would take to bring about monetary easing next year, adding that the bank would, in early 2015, assess the effectiveness of measures it had taken this year.

He said the ECB needed to employ all monetary policy tools at its disposal, adding that the bank must act if inflation was too low to maintain its credibility and so would need to use channels it had not touched before.

He said quantitative easing was “totally legal” and the ECB did not rule out what was legal. There is currently a stand off between the ECB and Germany’s Bundesbank over ECB preparations to buy sovereign bonds to prop up the weak euro zone economy.

On Friday Reuters reported that ECB officials were considering ways to ensure weak countries that stand to gain most from a fresh round of money printing bear more of the risk and cost.

German newspaper Sueddeutsche Zeitung on Saturday said the ECB was discussing how to avoid or reduce possible collective losses for the bank from its planned government bond purchases.

“That is an issue,” the newspaper cited ECB policymaker Ardo Hansson as saying. “It is a question of how much of the risk should be shouldered by individual countries in the euro zone.”

Read More ECB considers making weaker euro zone states bear more QE risk: Sources

Constancio told WirtschaftsWoche the ECB did not have an exchange rate target and did not measure the success of its monetary policy measures on the basis of their impact on the euro.

Follow us on Twitter: @CNBCWorld

Euro Plunges To New Low Before ECB Meeting

The euro is plumbing the greenback’s depths ahead of this morning’s critical European Central Bank (ECB) meeting. The common currency fell below US$ 1.23, a 27-month low, as traders gear themselves for talk of more ECB stimulus to prop up the eurozone’s flagging economy.

In general, it’s the possibility of global central bank action that is managing to keep the various assets classes moving. Whether it’s the Central Bank of Russia (tighter monetary policy next week?), the People’s Bank of China (easing of monetary policy?), the Bank of England (BoE), or the impending ECB rate announcement and press conference that takes place in a matter of hours, both traders and investors remain wary of unforeseen actions, or lack thereof, to initiate their early year-end exit strategies. Today’s ECB meet is really the next-to-last monetary event risk of the year. The Federal Open Market Committee is expected to go through the obligatory motions at its two-day meet later this month (December 16-17), while leaving the tougher announcements and clues for the new calendar year.

The BoE’s Expected Sideshows

Today’s BoE monetary meet is expected to be a non-event risk. Many are forecasting that GBP (£1.5671) will be unfazed by the announcement. Today’s focus lies across the English Channel with the ECB, and in particular Mario Draghi’s press conference after the obligatory rate announcement. The market will be looking for clues to solidify its EUR bearish convictions but the ECB president has become a dab hand at saying a lot without saying much.

The majority of the BoE’s Monetary Policy Committee’s (MPC) members are in no rush to raise U.K. interest rates, and it’s reason enough why the market expects Governor Mark Carney to keep the bank rate at +0.5%. Data this morning indicated that the U.K. housing market slowed further in November. The Halifax house price index, in the three months to November, rose by +0.7% from +0.9% the previous month. This is the fourth consecutive drop month-over-month since growth peaked last July. Carney and his team have been very transparent in forward guidance despite the dissent within the MPC. The market expects to be further briefed before there are any changes by the BoE, hence the anticipated sideshows.

Draghi’s Headaches Persist

The troubles at the ECB are far more delicate than most central banks can relate to, with every twitch, tick, and statement torn apart by capital markets seeking its own truth. Currently, the 18-member single unit continues to waddle within sight of its fresh two-year low outright (€1.2296), with investor expectations of further easing running “higher than normal.”

Euro to Face Draghi Testimony- USD/JPY Threatens Bearish Divergence –

Talking Points:

EUR/USD Fails to Benefit from Upbeat 3Q GDP Ahead of ECB President Draghi’s Testimony.

USD/JPY Threatens Bearish RSI Momentum Ahead of Japan 3Q GDP & BoJ Meeting.

USDOLLAR Marks Fresh Monthly High on Retail Sales- FOMC Minutes in Focus.

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Chart – Created Using FXCM Marketscope 2.0

  • Despite the better-than-expected 3Q Gross Domestic Product (GDP) report coming out of the euro-area, EUR/USD remains capped ahead of the 1.2500 handle; focus now turns to European Central Bank (ECB) President Mario Draghi’s quarterly testimony to the European parliament.
  • Will continue to favor a bearish outlook for EUR/USD as the Governing Council prepares to implement more non-standard measures in December, with the next downside objective coming in around 1.2280-90 (100% expansion).
  • DailyFX Speculative Sentiment Index (SSI) continues to flip around this week, but retail-crowd are net-short on EUR/USD going into the weekend, with the ratio currently holding at -1.05.


  • Will keep a close eye on the Relative Strength Index (RSI) for USD/JPY as the oscillator threatens the bearish momentum carried over from back in September.
  • Beyond Japan’s 3Q GDP report & the Bank of Japan (BoJ) interest rate decision, headlines surrounding the fiscal outlook may further dampen the appeal of the Yen amid the heightening risk for a snap election in December.
  • Long-term outlook for remains bullish for USD/JPY amid the uncertainties surrounding the fiscal & monetary policy outlook for Japan, with the next topside target coming in around 117.00-10 (61.8% expansion).

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USDOLLAR(Ticker: USDollar):

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Euro to Face Draghi Testimony- USD/JPY Threatens Bearish Divergence

Chart – Created Using FXCM Marketscope 2.0

  • Despite the better-than-expected U.S. Retail Sales report, the Dow Jones-FXCM U.S. Dollar Index is struggling to retain the advance to 11,323 even as St. Louis Fed President James Bullard sees scope to raise the benchmark interest rate at the end of 1Q 2015; will Federal Open Market Committee (FOMC) Minutes highlight a greater dissent?
  • Nevertheless, will keep a close eye on the headlines coming out of the G20 Summit in Brisbane amid the growing deviation in monetary policy.
  • Will continue to look for a topside RSI break out of the bearish formation favor a more meaningful push into the 11,312 (78.6% retracement) and 11,351 (78.6% expansion) region.

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— Written by David Song, Currency Analyst

To contact David, e-mail [email protected] Follow me on Twitter at @DavidJSong.

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