ECB Needs 'Forceful' Action Against Low Inflation: Bruegel

Finally! Just do it!

The ECB doesn’t have a target level for the Euro but they set a EURUSD level when making their economic projections. Over the last two years one has assumed that level to be somewhere in the 1.3250-1.3500 area. The bank for sure use some long term parameters when setting this level. It could be their own measurement or something like the 200 SMA weekly.

The strength of the Euro impacts inflation in the form of imported goods being more expensive the lower the Euro is (higher inflation) and less expensive the higher the Euro is (lower inflation). Several ECB council members have commented on this in details lately and we now think that the impact on CPI from different EURUSD levels is approx. as follows:

For each 300 pips EURUSD goes up, it has a negative impact on Euro area CPI YoY of – 0.1% and vice versa.

With that in mind, we could assume that when the ECB set their “budget” for 2014 – some six months ago – and EURUSD was in the 1.3250-1.3500 area – to see EURUSD above 1.3950 would have a negative impact of - 0.2% on their “budgeted” inflation for 2014. By 1.4250 this impact would be - 0.3% and by 1.4550 as much as - 0.4%.

Several ECB members have been out talking about the need for a lower Euro whenever the EURUSD pops up above 1.3900. It is the sort of calculations set out above they have in mind. And while the level above 1.3900 has just meant talking so far, it is now generally assumed in the market that reaching the level 1.4250-1.4500 will cause the ECB to act – if not earlier. The reason is simple as this level would take inflation 0.3% - 0.4% lower than their projected level.
One could likely equally assume that if actions are taken from inflation concerns, then the intention of whatever they come up with would be to take the EURUSD back to the 1.3500-1.3250 – the level likely used for their own “inflation” budget – adding 0.3% - 0.4% to CPI.

From these simple calculations, I set out a pretty straight forward EURUSD positions setup based on the assumption that the ECB will act should EURUSD go higher.

The position setup is to enter a short EURUSD as close to 1.4250-1.4500 level as I see deemed with the objective of taking the pair back to the 1.3500-1.3250 level.

I take the practical implementation of this strategy by setting out entry levels – and weighted higher the higher the pair goes – using my limit in the 1.3950-1.4250 area. Should the pair go even higher .

I will just sit put throughout that period focusing only on the following criteria as the ones that would invalidate the strategy:

That Euro area inflation is picking up despite the higher EURUSD level. This could occur for reasons of the Euro area economy moving forward at a much faster speed than seen so far and while GDP statistics are published too infrequent to monitor this, Euro area retail sales which we get monthly, is likely a good enough indicator to follow – in addition to the inflation data.
That there is no substantial altering of FOMC policies in the form of tapering being delayed or the FOMC extend the time for when USD short term rates will go up.

Either of those two criteria would invalidate my position setup.

Ahead of the ECB doing anything I will enter shorts > 1.3950 and where the average entry will be and how much I will be exposed is depending on high the pair will go. I will have used my limit by 1.4250.

Should the ECB then act, I would expect whatever they would be doing to have the impact of EURUSD getting back to 1.3500-1.3250 – as a minimum.

The invalidation criteria for this setup I have set out above.

The alternative to this position strategy is to await whatever the ECB will be doing at what point it becomes a tighter risk-reward analysis as entry levels would be closer to the objectives – still possibly with great enough attraction.

I underline that this my own medium term strategy setup for EURUSD and that by outlining those in detail to The EURUISD Insider subscribers, this is in no way a recommendation for others to do the same.

The main point about this paper was not to speculate about whether or not the ECB will act nor to advise on a position setup should they act. The main purpose was to set out what impact whatever they do likely will have on EURUSD.

from Tor

Summarised the likely EURUSD impact from ECB taking action on lower than projected Euro area inflation could look like the following:

MeasuresShort-term impactLong-term impact
A. Lowering lending ratesMinus 50 – 100 pipsAlmost nothing
B. Purchases of bonds in the bond market.Minus 250 – 350 pipsDepending on volume and length of time. Should it be a substantial program, EURUSD could go as low as 1.3000-1.2750
C. Purchases of bonds directly from banksMinus 250 – 350 pipsNot to the same extent as for B but with a substantial program also here, EURUSD could go as low as 1.3250-1.3000.
D. Conditional purchases of assets from banksDepending on the size of the program – I would say minus 100 – 250 pipsShould the program be to the size of C), there might be further falls medium term – simply from Euro printing. Should lending to corporates pick up substantially this could have a positive effect on growth, which again could turn be seen to be Euro supportive. Long term this could turn out to be positive for the Euro.
E. Negative deposit ratesMinus 250 – 500 pipsLater falls should the reaction be that investors are really switching out of EUR deposits. A more serious fall could come should there be a negative liquidity effect from this in the banking sector. Negative deposit rate is likely the most efficient tool in terms of bringing the Euro lower.

ECB/Germany is content to impose economic discipline via the exchange rate. No respite for Gallic slackers, monetary union by force, reform or suffer the consequences.

They cant . They aren't allowed to print money.

Draghi would rather have dildoes up his ass rather than bring the euro lower..... that being said, we can expect the eur/usd to continue its march to 1.45 and higher..

Drag-Higher is simply bait for traders to short EURUSD so his fellow bankers can take the other side of the trade and benefit.

Fecking funny, keep talking, loser!

What goes up will come down, it's a cycle and just a matter of time, the higher it goes, the harder it will fall, the counting begins!

Nothing will bring euro down unless the sentence "whatever it takes and believe me it will be enough" from Draghi.

The only thing you'll hear from Draghi is "it is well anchored.....", then it will shoot up to the moon...