EUR USD (1.2285) Mario Draghi’s verbal intervention yesterday had the kind of impact Japanese monetary officials can only dream of. The euro climbed 1.75 percent as sound-bites from his speech hit the wires. The German DAX rallied four percent. Spanish ten-year bond yields fell too, but only to 6.9 percent. It is tempting to look back at the comments and conclude it lacks substance. Admittedly, the ECB has repeatedly promised in the past to ‘do whatever it takes’, to little effect. Although no specific policy was announced, Draghi signalled a very important shift by bringing more aggressive action on bond purchases into the scope of the ECB’s mandate. The Bank has always justified the small-scale sovereign debt purchases to date as necessary to ensure the correct functioning of the market; it was not financing governments. In yesterday’s speech he blamed the risk premium imposed on sovereign borrowing for neutering monetary policy. He also highlighted the squeeze on interbank lending and on cross-border lending, which are also being indirectly undermined by the risks associated with the sovereign. To address this ‘financial fragmentation’ it will be necessary to drive down the risk premium, which will require bond purchases on a much greater scale than has been the case so far. The euro easily stabilised yesterday and has opened additional upside room to 1.2490. The best of yesterday’s trading volume was actually concentrated near the low, at 1.2150. This is where we count on the best support.
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Deutsche Bank