Draghi: an unwilling hot air balloon passenger?

The European Central Bank’s (ECB) president, Mario Draghi, is “unable to check the euro’s relentless rise,” one expert has commented, following the bank’s hotly anticipated meeting on Thursday afternoon.

The ECB announced interest rates would remain at 0% and that it’s €60bn-a-month quantitative easing (QE) programme will also remain intact until at least the end of 2017.

Before the meeting, many speculated that the central bank would start to cut back its costly bond-buying monetary stimulus soon. But, Draghi said he will make bulk of the QE decisions in October.

David Lamb, head of dealing at FEXCO Corporate Payments, says: “Mario Draghi is increasingly sounding like an unwilling passenger in a hot air balloon – unable to check the euro’s relentless rise.

“Mr Draghi’s studiously dovish tone failed completely to extinguish the blue touchpaper lit by the bloc’s strong economic performance”

“With Eurozone growth forecasts revised up for both 2017 and 2018, Mr Draghi’s studiously dovish tone failed completely to extinguish the blue touchpaper lit by the bloc’s strong economic performance.

“The single currency’s response was as rapid as it was breathtaking – surging 1% against the dollar to smash through the $1.20 mark,” he says.

The dollar is also under pressure as American jobs growth stalls and the US faces its second hurricane in just weeks, so the strengthening of the euro against the greenback was not unexpected today.

However, “the Eurozone’s robust growth – and Mr Draghi’s coded admission that QE could be reined in after the ECB’s October meeting – turned a rise into a rout,” says Lamb.

“$1.20 was once seen as a symbolic barrier for the euro, but on this evidence it could easily become the new normal”

“$1.20 was once seen as a symbolic barrier for the euro, but on this evidence it could easily become the new normal,” he adds.

Lee McDarby, Moneycorp’s managing director for UK corporate ‎foreign exchange and international payments, disagrees with this: “The downgrading of the ECB’s predicted inflation curve means the value of the euro at $1.20 may not be the ‘new normal’. Draghi has stated that they are continuing to work on QE but any tapering is likely to be a delicate balancing act.”

This rise in the euro’s value complicates any plans to exit the ECB’s QE programme as it limits already sub-target inflation by making dollar imports cheaper. This undermines European exports and cuts into corporate earnings from outside the Eurozone.

“Most of the decisions are likely to happen in October, so this suggests the next meeting takes on further importance. Until then, the euro may remain strong and impact euro pricing. The ECB also cut its forecast for Eurozone inflation below the 2% target, which makes this decision-making process even more challenging,” McDarby tells GTNews.

Mark O’Toole, vice president of commodities and treasury solutions at OpenLink, advises that, before the next big central bank move, “treasurers need to be asking themselves is whether their hedging strategy is sufficient.”

The impact of a dramatic shift in currency value on treasuries was seen following the UK referendum vote last year. The vote cause the pound to drop against the euro.

The vote caused the pound to drop against the euro which lead to UK budget airline EasyJet reporting its worst first-half loss for six years in the first half of 2017 as it took a £82m hit from the weaker pound. In October 2016, UK sportswear company Sports Direct International also warned that losses on its currency hedges could have a “negative impact of approximately £15m ($19m)”, if the value of the pound does not increase throughout 2017.

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