Gold remains defensive, but fairly well contained at the low end of the recent range, despite fireworks in the forex market today. The euro plummeted more than 200 pips against the dollar today, as the ECB cut rates closer to the zero-bound and announced asset purchases.
The ECB unexpectedly cut the refi rate by an additional 10 bps to a record low 0.5%. The central bank also pushed the deposit rate deeper into negative territory. That was the sideshow though; the main act consisted of ABS and covered bond purchases that are slated to begin in October.
ECB President Mario Draghi suggested he’d like to see the central bank’s balance sheet return to 2012 levels, which would mean an increase of about €1 trillion. In light of weaker outlooks for both growth and inflation in the eurozone, Draghi also made it clear that the ECB is prepared to employ additional measures — including sovereign bond purchases — if necessary.
With the ECB no essentially at the zero-bound, full-on QE is really the last tool in the toolbox. The reaction of eurozone yields today suggest that tool too may have to come out at some point.
The BoE held steady today, as was widely expected, as so too did the BoJ. However, BoJ governor Kuroda made much more overt comments about his preferred trajectory for the yen. “I don’t think it’s undesirable for Japan’s economy for the yen to weaken further from current levels,” said Kuroda.
The currency war is in full-swing and I suspect it’s only a matter of time before the recent dollar strength starts negatively impacting U.S. exports; and by extension the broader — and arguably still vulnerable — economy. At that point, the Fed may be forced to react with further measures of its own to weaken the greenback.