Thursday, July 18, 2019

Increased currency volatility likely after ECB's extension of monetary easing

Dec 04. 2015
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THE European Central Bank's decision on Thursday to extend its monetary-easing policy has disappointed the markets and contributed to the current volatility in the euro zone's money and investment markets.

However, the Bank of Thailand insists the ECB decision was expected by many, even though the size of the additional quantitative easing was not as high as some had predicted.

“The ECB’s policy announcement is in the direction that many expected, even though there is some difference in the size of the quantitative easing. This has led to the strengthening of the euro while currencies in the region [Asia] have also strengthened along with the euro this morning,” assistant governor Chantavarn Sucharitakul said.

Reorient Group’s chief strategist and head of research, Uwe Parpart, said the markets did not take kindly to being teed up for one outcome and then getting quite another, with the euro immediately rising sharply after the decision and later settling at the largest gain against the US dollar in six years.

The euro was trading at US$1.0615 on Wednesday, and strengthened to $1.0940 on Thursday after the ECB’s decision.

European stocks tanked, notably on the export-heavy exchanges. The Deutsche Boerse Index (DAX) dropped by 3.58 per cent on Thursday, while France’s CAC 40 Index fell by the same amount.

The main stock indices in the United States followed suit, with the S&P500 down 1.44 per cent and the Nasdaq falling 1.67 per cent when compared with their openings.

Asia’s shares did not look any better yesterday, with Japan’s Nikkei 225 down 2.18 per cent, China’s Shanghai SE Composite dropping 1.67 per cent, and Hong Kong’s Hang Seng falling 1.04 per cent.

The SET Index and Malaysia’s Bursa index were also heading down yesterday afternoon.

The baht and other currencies in the Asia-Pacific region strengthened, along with the euro, against the greenback.

Chantavarn said the ECB’s continuous easing of its monetary policy meant that its policy direction was going to differ from that of the US Federal Reserve, which would result in currencies in the region being even more volatile next year.

Reorient’s Parpart said ECB chief Mario Draghi’s announcement of a 10-basis-point deposit-rate cut for the euro to 0.30 per cent, a half-year extension of a 60-billion euro (Bt2.34 trillion) monthly bond-buying scheme to March 2017, and no expansion of asset purchases – the latter being by far his most effective tool – had set up a perilous binary-outcome situation in reaction to the US November employment report, which was due to be announced last night.

“A strong US report could have the effect of offsetting the Draghi let-down and stabilise the US dollar against the surging euro. A below-consensus jobs number would reinforce Thursday’s trades, force more euro short covering and drive equities down further. The only certainty is greater volatility,” he said.

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