There is no doubt that the decision by the ECB this past week has badly stained the reputation of both Mario Draghi and the European Central Bank. The ferocity of the price moves seen across the currency, bond and equity markets leave little doubt that Draghi and company managed to greatly mislead the investor/trader world by overpromising ahead of their December meeting and vastly under delivering.
On Friday, the Vice President of the ECB, Vitor Constancio reported to CNBC the following:
“We have to recognize that the markets got it wrong in forming their expecatations”.
Mr. Draghi seems to have at least understood the damage to their credibility, belatedly I might add, for he was quick to modify his speech in front of the Economic Club of New York by making sure he included the following:
“there is no particular limit to how we can deploy any of our tools. There is no doubt that if we had to intensify the use of our instruments to ensure that we achieve our price stability mandate, we would”.
I was wondering why the euro, which had floated back up above the 1.090 level after falling below that level when the US payrolls number was released, suddenly fell back rather swiftly below that level during the session.
Here is a very interesting nugget being reported by the Wall Street Journal (I am quoting from Dow Jones here):
“Asked by former Bank of England Governor Mervyn King whether his comments were meant to “offset” the market’s reaction, Mr. Draghi said: “No, not really. But not — well, of course”.”
There you have it.
Another Central Banker, after realizing that he himself, and his compadres that make up the ECB, had badly misled the markets ahead of their decision to leave the bond buying program at EUR60 billion per month (they extended it for 6 months however) and to only lower the deposit rate 10 basis points, was forced to do damage control in an attempt to salvage what is left of his own shattered reputation.
Draghi, who has perhaps been one of the most efficient Central Bankers I have seen at JAWBONING the euro lower (remember his comments when it was up near 1.400) understands that if he is going to be able to influence the direction of his currency by flapping his jaws in the future, that he had better get out there and make some amends for the Central Bank’s ineptness this past week.
After all, if during the previous two months he and his cohorts had gone out of their way to talk a big game of “doing whatever it takes” to achieve their goal of reaching a 2% annual rate of inflation, and in the process drive the euro lower (which is where they want it to go), through the implied notion that they would indeed be bold in their monetary policy, what in the world does he expect to happen the next time he gets out there and starts making noises about the euro being too strong? Answer – nothing. In other words, his ability to move the euro around through the use of “verbal” intervention, would be seriously imperiled.
Thus, the necessity of trying to add some caveats in his speech Friday to offset the damage done on Thursday.
This is the reason that I now believe we are right back into a period in which CONFUSION and UNPREDICTABILY is going to reign once more. Instead of the Central Bank providing some sort of stability and calmness in the market, it has done the exact opposite by throwing a monkey wrench into the EXPECTATIONS of traders/investors. This has resulted in massive, and I do mean ‘massive’ repositioning by traders all across the globe. It is the SOLE reason that we witnessed so much chaos and carnage in the markets this past week.
I cannot even imagine (well maybe I can) the size of the margin calls being doled out and the panic and fear that the ECB produced by this display of incompetence. One can only hope that they learned something. As I have said before, I am no fan of Central Bankers but as Central Bankers go, at least our Fed has been very consistent in describing the conditions that they are looking for PRIOR to making any interest rate hikes. Traders can therefore gauge the economic data that is coming out here in the US and feel somewhat confident that they can know the mind of the Fed, as much as that can be known. That helps to REDUCE market chaos and uncertainty and provides for more orderly and well behaved markets, not the madness that the ECB unleashed.
I must also admit that the Bank of Japan is also very good at telegraphing its intentions. They have long ago learned how to conduct themselves in that regard. They are so good that I might add, having learned the hard way NOT to ignore them, that they can move the Yen quite easily by announcing their thoughts on its level. Long time currency traders know quite well that if the BOJ says the Yen is overvalued, guess what, it is overvalued and is coming down. On the flip side, if the BOJ says the Yen is undervalued, guess what? it is undervalued and is going to rise. These traders understand that the BOJ WILL TAKE STEPS to achieve what they are wanting to achieve and thus their reputation and credibility is well deserved.
Perhaps Draghi and company are simply too new to this game to understand the significance of their words and the need to connect those words to concrete action. I can only hope so for it they do not learn from this latest fiasco, we are going to see even more of this chaos in the future, something that no trader or investor wants to see.