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The Price is Right

Summary

Firstly we are not suggesting that Mario Draghi be the next host of the game show of the name above if it comes back to our screens having last aired in January 2007 but we do believe that the European Central Bank (ECB) Governor is an accurate judge of price.

Firstly we are not suggesting that Mario Draghi be the next host of the game show of the name above if it comes back to our screens having last aired in January 2007 but we do believe that the European Central Bank (ECB) Governor is an accurate judge of price.

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Markets are expecting Mario to deliver a further easing of monetary policy at the next ECB meeting on 3 December.  Whether that’s manifested via even more negative interest rates or more asset purchases, the financial markets aren’t sure but they are expecting something and consequently the potential for disappointment is quite high.
Mario has become an expert at saying the right thing at the right time to get what he wants as we pointed out in our blog ‘For FX Sake!’ in July earlier this year.  So we think there is room for disappointment for those focusing on the divergent paths of monetary policy at the ECB and the US Federal Reserve who are predicted to raise the Fed Funds rate for the first time since the financial crisis at their next Open Market Committee meeting on 16/17 December.
What interests Mario is the level of the euro and that it remains competitive, aiding economic recovery.  The media and many pundits focus on the exchange rate versus the US Dollar with headline grabbing predictions of parity between the two currencies in the near future (currently around 1.06).  Mario places more emphasis on the effective exchange rate of a basket of currencies which is the first of the following three graphs.  What he doesn’t want to see is Euro appreciation hence the rhetoric to keep it down against the major currencies not just the US Dollar. Nor does he want the Euro to be viewed as a one-way bet and a funding currency for speculators and with it, increased volatility
The European economy was improving before the terrorist attacks in Paris and inflation is improving albeit from negative territory but deflation seems unlikely as depicted in the second of the graphs.  Money supply growth is illustrated as being robust in the third graph.
Whether or not it gets it, Europe doesn’t need further monetary stimulus at the moment, it just doesn’t need a stronger Euro.  At these levels, the price of the Euro seems about right.
Super Mario may well turn out to be an appropriate epithet and in years to come he may be judged to have been an excellent host of the ECB.
Daily Nominal Effective Exchange Rate of the Euro (against a basket of currencies):
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Source: ECB
Eurozone Harmonised Inflation Consumer Prices
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Source: ECB
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