Who’s afraid of Mario Draghi? Looking at the euro, currency traders are.
The US churned out some decidedly unimpressive jobs data late last week, with a slower than expected pace of job creation and a small rise in the jobless rate. Seasonal effects and economists’ famously poor form in predicting and measuring August jobs are likely to have played a role, but a payrolls miss is a payrolls miss. The market reaction: nothing more than a brief drop in the buck.
One factor holding back a more pronounced reaction is the risk of a sense of humour failure from the European Central Bank president. Mr Draghi is due to take to the stage on Thursday after what is expected to be a humdrum decision to keep interest rates and asset purchases on hold for now. The question is the force with which he pushes back at the strength of the euro. Silence on the matter is not really an option, unless the central bank is truly happy to send the currency flying and push the inflation target further out of reach.
“We know that the market is shrinking back from higher euro levels,” says Ulrich Leuchtmann, an analyst at Commerzbank in Frankfurt. “If Draghi was going to say nothing material on the euro again on Thursday (as was the case at the ECB press conference in July or in his speech in Jackson Hole in August) the door would be wide open for stronger exchange rates.”
A jump to $1.25, from about $1.19 now, would certainly be achievable in that scenario, he adds. Mr Draghi is a very different beast to his predecessor Jean-Claude Trichet, whose messages about “brutal” rises in the euro and “strong vigilance” over the inflation outlook were well-known coded instructions to sell the currency.
Still, investors know what they are looking for, especially since Mr Draghi pointedly noted in March 2014 that “each 10 per cent permanent effective exchange rate appreciation lowers inflation by around 40 to 50 basis points”.
In an extreme scenario where Mr Draghi lost his grip on the currency, and the euro made it above $1.25, do not rule out an extension of the central bank’s bond-buying programme, warns Frederik Ducrozet at Pictet. So it is likely not only currency watchers who are nervous.