European Central Bank President Mario Draghi could certainly pat himself on the back Thursday, given that his comments about the high level of the euro had the desired effect of moving the euro lower.
Whether these tactics will be successful going forward, is another matter, traders said.
The euro rose to a high of $1.3993 as the Draghi press conference began, the highest levels seen since October 31, 2011, only to trade at $1.3849 shortly after the press conference was over.
The nearly 150 point slide in the euro, driven by the Draghi’s comments, caused many market players, who had been betting on a test and potential break of the psychological $1.40, to lose money.
While bruised and battered on the day, traders nevertheless still favored holding a euro long position, although perhaps at lower levels.
“A lot of euros were bought in the $1.3970/90 area,” said one trader, of the early trading action seen as Draghi began speaking.
When the central bank chief strongly suggested that action would be seen in June, “people said, oh no,” and bailed out of their euro longs versus the dollar and on the crosses, he said.
Indeed, the persistent strength of the euro remained a key focus of Thursday’s Q&A session, with Draghi repeatedly asked about the currency.
“I can say one thing”, Draghi said, “The strengthening of the euro in the context of low inflation and still lower levels of economic activity is a cause for serious concern in the view of the Governing Council.”
Draghi repeated that the euro level was “not a policy target,” but nevertheless “important for price stability.” He stressed that a continued firming of the euro “would be cause for serious concern.”
“It will have to be addressed,” Draghi said.
Just how euro strength would be addressed was the subject of great debate in FX circles.
James Ashley, chief European Economist and Timo del Carpio, European Economist at RBC Europe Ltd saw two main messages from Thursday’s ECB press conference.
“First, in the absence of an upwards revision to the staff’s inflation projections next month (highly unlikely in our view) the Governing Council will act next month – Not ‘might’, not ‘is minded to’, but will,” they said.
RBC maintained their existing view that ECB action “will most probably be a combination of the conventional (rate cuts) and unconventional (liquidity injections).”
The central bank’s other message earlier was that the ECB views the current euro FX rate as a “‘serious concern’ (a phrase repeated so often in the press conference today that almost became a mantra),” they said.
The ECB has to hope that any easing action, when taken, would serve to weaken the euro, the economists said.
However, if this is not the case, “then the relentless emphasis from President Draghi today on the euro’s strength suggests further subsequent intervention should not be ruled out,” Ashley and del Carpio said.
RBC reiterated their call for June “to bring a narrowing of the corridor (implying a reduction in the refi rate), flanked by liquidity injections (through suspending SMP sterilization and, possibly, reducing the minimum reserve further).”
There was even debate Thursday about the intent of Draghi’s euro centric remarks.
“It remains to be seen whether Draghi’s remarks are a means to stabilize the rising euro in order to gain time until the next CPI figures, or are indeed a market signal aimed at alerting the next cut in interest rates,” said Ashraf Laidi, chief global strategist at City Index.
He maintained that it is more likely to be the former than the latter.
“The ECB has more reasons to stick to its waiting game, while simultaneously discreetly talking down the currency by acknowledging its role in dampening inflation, rather than referring to the pace of its rise or to negative impact on corporate margins,” he said.
If eurozone CPI falls below 0.5% and holds below it by June, then the ECB will likely slash the refi rate by 10 bps, Laidi said.
And “persistent disinflationary worries into September would prompt a conditions-based LTRO 3,” he added.
City Index looked for eurozone inflation to stabilize by the end of summer (as indicated by the higher core CPI of 1.0%) and this should “keep the ECB from acting,” Laidi said.
The euro was trading at $1.3857 Thursday afternoon, on the low side of a $1.3849 to $1.3993 range.
A close below $1.3910, yesterday’s low and close, would mean a “key day reversal” and suggest scope for further euro losses.
Nevertheless, traders sought to bottomfish, and planned to use pullbacks towards $1.3800-20 to again try a long position.
Those with long memories remembered ECB President Draghi’s comments from August 2, 2012, a day when the euro fell over 250 points on disappointment about the ECB’s decision and press conference.
The euro closed at $1.2180 that day, on the low side of a $1.2135 to $1.2404 range and up from the 2012 low of $1.2043, seen less than two weeks earlier on July 24, 2012.
At the time, Draghi was attempting to allay fears about the eurozone peripheral crisis and talk the euro higher.
“It is pointless to bet against the euro, it’s pointless to go short against the euro … to go back to the lira, the drachma; It’s pointless, because the euro will stay irreversible,” Draghi said.