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Home > Blogs > Anthony Harrington > Draghi proves masterly at manipulating the euro

Draghi proves masterly at manipulating the euro

Eurozone: Draghi proves masterly at manipulating the euro Anthony Harrington

I recently had the pleasure of interviewing a few FX strategists on the theme of making above average returns from currency trading. There was near universal agreement among those I spoke with that as far as currencies are concerned, we have been living in a headline driven world. If you could second guess the next headline you pretty much knew what the reaction of, say, the euro against the dollar was going to be.

For those who think that politics is akin to poetry and as such only partially, and rather unsuccessfully reducible to logic, second guessing politicians might seem a thankless task. In fact, however, if you have a grip of the broad macro factors driving the major economies (the US, China, Japan, the eurozone) and have done your analysis of country specific factors like balance of payments, the state of credit in the local economy and so on, the headlines are often not that hard to call. And from this it follows that betting on currency direction is not that difficult either. Of course, politicians are not the only ones who make headlines. Central bankers, these days, get top billing right up there along with heads of state and finance ministers. Press conferences by Federal Reserve chairman Ben Bernanke and European Central Bank president Mario Draghi can move the currency markets by 100 pips in either direction as they speak. Dovish noises by Draghi cause the euro to plummet as traders immediately see signs of a potential rate cut by the European Central Bank. If, on the other hand, Draghi is heard to say that the exchange rate is best left to the market, that is taken as hawkish and the euro heads for the ceiling.

In his regular monthly press briefing on 7 March 2013 Draghi made it clear that no rate cut is anticipated by the ECB, but he also, in the opinion of a number of analysts tracking the conference, left open the possibility that a cut could be made if circumstances warranted it. He was unequivocal about lowering the ECB's current growth estimates for the eurozone, but at the same time indicated that the ECB expects growth to return in the second half of 2013 and into 2014. This two steps backwards, two steps forward dance continued throughout the conference, leaving analysts not a lot wiser than they were before he started speaking. Inflation is expected to remain under 2% and the ECB is playing a parallel game to the Federal Reserve in maintaining an "accommodative stance" (rates low for longer) off into the dim and distant future.

However, with Draghi not doing anything explicit to weaken the euro - ie no rate cuts and no immediate additional LTRO - and with the Fed hell bent on weakening the dollar through continued quantitative easing - the market found it rather easy to favor the euro over the dollar, even if Draghi's conference did not give them much to go on. The result was a surge in the euro against the dollar, with the euro rising from an early morning low of 1.29800-ish to a high point of just over 1.31100, or around 130 pips (1 pip is the fourth decimal to the right of the point). In FX terms, that is very substantial for a few hours trading. Thank you Draghi.

It remains to be seen just how durable this latest Draghi factor turns out to be. The euro could, of course, manage to shrug off its recent fading spell and head on back towards 1.34, which would once again have German exporters fretting about the competitive disadvantage they would be laboring under with a "high" euro. However, markets generally are not enamored of the EU's austerity program, regarding it as severely anti-growth, and this large macro brush stroke is likely to weigh heavily on the euro as it tries to rise. German exporters may well find that they have little to worry about on the currency front after all. Many analysts are still forecasting the euro to be around 1.20 to the dollar by the end of the year, a long way down from where we are right now. (On the other hand, you can also find analysts who are very bullish on the euro and see it headed for 1.40. The future, as they say, is uncertain....)

Further reading on the eurozone's growth issues:

Tags: currencies , currency war , dollar , ECB , euro , eurozone , eurozone debt , eurozone debt crisis , FX , Mario Draghi
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