Right, so Mario Draghi has succeeded in driving EURUSD to its highest level since September 8.
As documented earlier, Draghi’s remarks about the ECB “looking through” transitory weakness in inflation pushed the single currency sharply higher and a few minutes ago, EURUSD climbed above its November 9 peak of 1.1300 to hit the highest since the September 8 high of 1.1327.
I’m reasonably sure Draghi didn’t mean to do that, but as I said about an hour ago, “this kind of thing is necessary if central banks are going to maintain their hawkish bias in an environment where inflation probably isn’t going to stage any kind of remarkable and/or sustainable uptick.”
In other words, you’ve got to spin a macro narrative around this. You can’t just come and say something like “well, we’re going to have to scale this back because it’s inflating all kinds of asset bubbles and besides, we’re running out of shit to buy anyway.”
BofAML agrees with that assessment. Read below as the bank chides you for trading this like it was a “hawkish festival.”
Prudent tone throughout the speech. Draghi’s speech triggered some excitement this morning because he argued that a central bank, which does not change its policy amid improving cyclical conditions, is, in effect, loosening its stance, thus implicitly opening the door to some tightening. We don’t think we should be surprised by that. Rather than engaging in a “hawkish festival”, we think we should pay attention to the very prudent tone he maintained throughout.
Building a macro narrative for tapering. We have been arguing that tapering will come anyway, largely because of technical/ political constraints around QE. The ECB will still have to justify this with a macroeconomic narrative. This is what the ECB President has set out to do. But what he said today is also consistent with a very slow exit and, in particular, with a growing decoupling between QE — now increasingly presented as an emergency tool — and policy rates, which could well stay “low for long”, because a key message from the ECB is that, while deflation risks have abated, inflation normalization (back to “below but close” to 2%) will take very long.
Conditions changed compared to three years ago. Draghi insisted on the idea that QE was triggered by a sense, three years ago, that the Euro area was at risk of a negative spiral, with cyclical deterioration becoming entrenched and possibly taking potential GDP growth down, with the output gap thus closing “in the wrong direction”. This called for a monetary stance bringing the economy onto a sounder footing “without undue delay”. The situation has changed now, with a central bank confident that cyclical conditions have brightened and deflationary spirals have become much less likely. Emergency action is thus much less necessary.