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Monetary policy meeting of the ECB

Alternavest Author

08.09.2022

Thursday's ECB monetary policy meeting will be a bang for the buck. Expectations remain high that the ECB will raise rates by 75 basis points, but even if it is only 50 basis points, it will tighten monetary policy through other means, notably the asset purchase program (APP), which remains in full swing, and the PEPP, as well as the TPI (transmission protection instrument) introduced in July to limit divergences in bond spreads. Surprisingly, sentiment is more negative than indicators suggest, as Econoday points out, "...not only is the ECB now much more focused on fighting inflation than boosting growth, but economic activity in the eurozone has exceeded market expectations anyway." This is a vote for 75 bps.

Inhalt

  • Record lows for various currencies

  • Consolodation of the Euro - Other Currencies Catching Up

Record lows for various currencies

The euro has not (yet) reached yesterday's historic low. While the euro has settled at the low level, we have other record lows in other currencies. The pound fell to 1.1443, a 29-month low. 

 

Even more dramatic was the rise in the dollar/yen to over 144 yen, the worst level since August 1998. This represents a devaluation of the yen by about 20%, and of course there are quiet hints of intervention in the air. FinMin Suzuki said the recent yen moves were "a bit quick and one-sided," which is a bit clearer than other recent comments. "We will continue to monitor the markets with great urgency, and if the movements continue, we will respond as needed. This is still far from a conclusion, and expresses more concern about the pace of movement than the actual level (which is fueling Japanese inflation a bit but benefiting exports more).

Consolodation of the Euro - Other Currencies Catching Up

There has not been an intervention by the BoJ since Fukushima in 2011, a special case. Before that it was 1998 and the rate was 147.65. But critics say intervention now would be a drop in the bucket because relative interest rates are forcing this move and Japan can change this more easily and cheaply by lifting the interest rate cap.

 

The dollar-renminbi ratio is also excessively firm. Breakouts like this are abnormal and lead to tears. 

 

The most remarkable thing about the foreign exchange landscape is the consolidation of the euro while other currencies are sort of catching up. There seems to be a certain underlying strength to the euro that is inexplicable unless you think it is possible to stave off recession as much as possible through debt financing. This seems to be the case in the U.K. as well, despite the Conservatives' usual aversion to government debt. We haven't reached emergency levels yet, but breakouts like this can end badly if big traders start closing positions and trigger landslides.

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Monetary policy meeting of the ECB

Thursday's ECB monetary policy meeting will be a bang for the buck. Expectations remain high that the ECB will raise rates by 75 basis points, but even if it is only 50 basis points, it will tighten monetary policy through other means, notably the asset purchase program (APP), which remains in full swing, and the PEPP, as well as the TPI (transmission protection instrument) introduced in July to limit divergences in bond spreads. Surprisingly, sentiment is more negative than indicators suggest, as Econoday points out, "...not only is the ECB now much more focused on fighting inflation than boosting growth, but economic activity in the eurozone has exceeded market expectations anyway." This is a vote for 75 bps.

inside-alternavest.article.writtenBy Massimo Di Santo.
Alternavest Partners GmbH Otto-Heilmann-Str. 17 82031 Grünwald

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