ECB President Draghi revealed his bond-buying plan, named ‘Monetary Outright Transactions’, similar to the plans leaked to the press Wednesday. While the market did rally Wednesday on the rumour, the EURUSD (FXE) has sold off from the high Thursday.
There is probably more than one reason for the euro’s weaker trade Thursday. Failure to reduce the money rate by the ECB, despite a European economy sinking into a recession, is a market disappointment. Next, the intention to ‘sterilize’ the bond purchases by simultaneously draining funds from the markets to curtail the money supply growth is self-defeating. This will reduce funds that might be available for the private sector, or for private purchases of sovereign bonds. This may please the Bundesbank, but it will hurt the economy. Finally, despite the promise to buy an unlimited supply of bonds, there are some restrictions which may not be appealing.
Despite the euro lagging, equity markets are moving higher. The Spanish IBEX 35 is up 3.57%, the Italian FTSE MIB Index is up 3.58%, and the US indexes are up about 1.5%.
Will equities pull the euro higher?
There was some constructive economic news coming from the US Thursday. The ADP Employment Change report showed 201K new hires, well above the 140K estimated, and the 173K last month. US Weekly Initial Jobless Claims were down to 365K, less than the previous week and less than estimated. Friday we get the monthly unemployment rate and the NFP reports. With an election in two months, it should not be a surprise to see market-friendly numbers today (Friday).
It seems we get negative economic European news every day. The EU GDP (Y/Y) came out Thursday, -0.5 worse than the -0.4 anticipated. French unemployment was 10.2%, a 13 year high, and heading higher.
With the European economy lagging the US, why should we buy the euro?
We think it is best to take a look at the NFP report prior to initiating a trade. Regardless of the numbers, there will still be those cheering for a form of QE 3. This may help their friends, cronies and future employers at the banks and brokerage houses, but the higher food and energy costs that are coming and associated with QE, are disastrous for those on Main Street and the US fly-over country. The coming election will be decided on Main Street so QE 3 does not seem logical at this time.
If rumours of QE weaken the USD, we will be looking for a spot to buy it versus the euro.
