Draghi keeps the balancing act going

Outlook

The euro is trading in a choppy, wide range around 1.3825. Every day some traders try to get a bandwagon going, first down and then up, but we end up with one-hour spikes. Traders are fully aware that conditions are poised on a knife blade and they refuse to be stampeded. Mr. Draghi is keeping the balancing act going. Speaking in Amsterdam, he said “The objective here would not be to defend the current stance, but rather to in-crease meaningfully the degree of monetary accommodation. The Governing Council is committed –- unanimously –- to using both unconventional and conventional instruments to deal effectively with the risks of a too-prolonged period of low inflation.”

This is a very clear message. The ECB will increase accommodation and use every tool to fight deflation. Moreover, it won’t be some wishy-washy initiative but a “meaningful” one and not blemished by quarrelling in the council—the council is unanimous.

Draghi also said the transmission mechanism between policy and data is at fault for taking too long. The ECB does not see broad-based deflation risk and expect inflation to return to normal, but it will take a long time. He said “A rise in the exchange rate, all else being equal, implies a tightening of monetary conditions, a downward impact on inflation and po-tentially a threat to the ongoing recovery. If so, this would call for policy action to maintain the current accommodative stance.”

This is jawboning the euro down with as much skill as possible, and yet the euro keeps returning to the median. It should fall. Draghi wants it to fall. Devaluation is the necessary ingredient to boost inflation via imported prices. There’s no point in talking the euro down if the euro doesn’t actually go down. No central banker can afford to be seen as ineffectu-al.

We fail to see why this is not the top headline everywhere. “European central banker engages in verbal intervention and fails.” The FT story features Draghi supporting publishing minutes, but not naming names to protect the independence of members. Near the end of the story, accommodation is mentioned. Seekingalpha.com reports “The ECB would consider broad-based asset purchases if the outlook for eurozone inflation continues to weaken, ECB President Mario Draghi has said, adding that further strengthening of the euro could also prompt action.” Re-ally, that’s it? We seem to be alone in thinking Draghi jawboning is a very big deal. It’s a policy departure for the ECB, which has held from the very beginning that a strong euro means a strong eurozone and is a vote of confidence in ECB management. But if the financial press is not impressed and traders are not impressed, we have to be careful not to overstate. Still, Draghi’s reputation is on the line. Granted, he is still using conditionals—if deflation worsens, if the euro strengthens. We worry that if the euro does not fall, Draghi will act and at the May meeting, not June as most ana-lysts think. He can’t afford not to.

The calendar today includes US durables and the weekly unemployment claims. We also get the Kansas City Fed manu-facturing survey and a few other things, but claims is probably the biggie, after last week’s delicious improvement. But it’s not really a top-drawer factor and so we are still awaiting a catalyst to move this market forward.