View: Draghi’s comments should draw EUR/USD back to selling levels, m/t trend bearish
Reading some amusing comments reacting to Draghi yesterday, the best so far being ‘there won’t be a Euro short left once the ECB has finished’ (to paraphrase) which we’ll have to put down to heatstroke. Fundamentally the best adjustment mechanism to help peripheral realignment is a weaker currency. The other ideas such as the confidence the economies will receive from effective fiscal consolidation and the structural reforms that sit alongside this prescription sound nice but are rather ineffective in the shorter-term and overlook the recessionary pressures that are resulting from them, most evident in the Greek death spiral. ECB medicine is likely to be equally ineffective as we know that the central bank itself is one of the key proponents of the austerity model and German opposition to bond buying will continue to obstruct. We don’t think another LTRO would be a game changer or for that matter another rate cut, already justified by the inflation outlook. Perhaps the aim is just to buy time over the summer. Furthermore the kind of firepower needed to really rebuild confidence will continue to lag what is needed, evident in the sums the EFSF has and ESM has to work with.
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