I’m not sure what exactly Klaas Knot (he’s president of the Dutch Central Bank) was trying to accomplish on Sunday by reiterating an aggressively hawkish message, but it seems to me that in light of recent events, this is not the time to be making bold pronouncements about how QE needs to be wound down immediately.
I mean Knot is a hawk, but after last week, you’d think that everyone at the ECB would be on the same page in terms of being careful not to do or say anything that might exacerbate euro strength. Draghi was apparently blindsided by Mnuchin’s weak dollar comments in Davos and for the first time in a long time, Mario seemed some semblance of helpless. His passing nod to FX “volatility” in the post-meeting presser on Thursday would have probably been sufficient to create a bit of euro weakness under normal circumstances, but coming as it did just 24 hours after the U.S. Treasury Secretary set out to jawbone the dollar lower, what Draghi said amounted to bringing a knife to a gunfight.
Clearly, he realized that, which is why he went on to call Mnuchin out with his now infamous “someone else” line and you’ve got to believe that if the U.S. pushes the envelope any further, Draghi will make sure and bring his four pound next time around, where that means something explicitly dovish.
But for the time being, the ECB is on the back foot. That is, they were staring down a daunting communications challenge last Thursday and the last thing they needed was Mnuchin’s weak dollar rhetoric. Now, the ECB looks helpless in the face of EURUSD appreciation. Here’s the annotated chart from last week that shows you how the only thing that helped was Trump’s “strong dollar” CNBC comments but even that was faded quickly (the “ECB presser” annotation shows you just how unimpressed the market truly was with Draghi’s attempt to talk the euro lower):
Ok, so given that, what definitely didn’t need to happen was this, via Bloomberg:
The European Central Bank has to end its quantitative easing as soon as possible, according to ECB Governing Council member Klaas Knot, who said there’s not a single reason anymore to continue with the program.
“The program has done what could realistically be expected of it,” Knot said in an interview on the television talk show Buitenhof on Sunday.
Knot, 50, said there’s enough proof for the ECB to end its QE program in September, adding that’s also the current sentiment in the Governing Council.
I’m sorry, but what the fuck is that Klaas? This is not the time.
Everyone already thinks the ECB is inclined to end APP in September, so he really didn’t need to reiterate the point. And sure, it’s great that there are still some sane people out there who apparently realize that global QE is creating all manner of distortions and encouraging rampant speculation, but today was not the day for that kind of aggressive rhetoric. Not after last week.
Who knows if FX traders will latch onto this, but what I do know is that when you’re coming off a week that was defined by everyone scrambling around to avoid more euro strength in the face of Mnuchin’s “oops” moment (which wasn’t really an “oops” moment), the last thing you want to do is come out and say something like “we need to end QE as soon as possible”.
Oh, and meanwhile, EUR net longs hit a new record high through Tuesday ahead of the ECB meeting, rising by $0.9 billion to $22.2 billion overall.