EUR: Value is important - MUFG

Derek Halpenny, European Head of GMR at MUFG, suggests that the press conference by President Draghi has left MUFG comfortable with their current view that QE will be extended in March by six months at the current pace of EUR 80bn per month.

Key Quotes

“We will also get new forecasts for 2019 at the December meeting and the inflation forecast may well be used as justification for the extension.

We are pretty convinced that keeping the euro in check is an important element at this juncture. The ECB may see better prospects for lifting inflation next year with a further period of steady monetary stimulus and will probably see the risks of any form of change in stance as too high.

Data yesterday on the euro-zone balance of payments emphasises the importance of the current monetary stance in ensuring continuation with the “portfolio rebalancing” effect that pushes capital into foreign markets, thus ensuring the recycling of the current account surplus and keeping EUR from appreciating. The data for August yesterday confirmed euro-zone investor purchases of long-term foreign bonds totalling EUR 450bn. Foreign investors also sold EUR 211bn worth of long-term eurozone debt securities. Those outflows combined with net equity flows resulted in a total 12mth net securities outflow from the euro-zone of EUR 486bn, more than offsetting the 12mth current account surplus of EUR 345bn.

The sudden spike in EUR/USD yesterday on the acknowledgement that no discussion on a QE extension took place highlights the risk of euro strength on a policy miscommunication next year. But assuming the ECB avoids that and acts decisively in December, the euro is set to remain under downward pressure. Today’s further decline in EUR/USD has worsened the technical picture given the break of the post-Brexit intra-day low of 1.0913 on 24th June and now the low of 1.0822 on 10th March is in sight.”