Traders who want a reason to buy the dollar against the euro might look at the diverging rhetoric between central bankers in the Eurozone and US. ECB officials are expressing continuing concern over low inflation and stress their capacity to take further action. US Federal Reserve officials are painting a picture of continued tapering of bond buying and a return to monetary normality.
Add in the latest solid US employment and job openings data, which at least encourage a more positive view of the dollar’s prospects, and a renewed slide in the value of the euro against the greenback could be in the offing. Communications policy has become a key part of central bank tool kits in recent years, particularly as policymakers have had to become ever more creative in attempts to craft economic recovery.
Consequently, forex traders have had to become ever more attuned to reading the runes of central bank comments. For example, traders may not be that familiar with JOLTS data, which reflect US job openings and labour turnover, including both hires and quits. But Federal Reserve chief Janet Yellen has made it clear she monitors that data stream.
So JOLTS data should now jolt traders’ attentions.
On a policy level, the market knows that the European Central Bank is about to deploy a whole new raft of measures to try to avert the threat of deflation. Traders may conclude that even if the ECB measures have not immediately put the skids under the euro, the central bank has provided justification for not buying the single currency.
Anyone who has not got the message should briefly review ECB’s recent rhetoric, which has been blunt.
“Clearly, what we wanted to indicate is the fact that monetary conditions will diverge between the euro zone on one hand and the US and the UK on the other for a long period, which will be several years,” ECB executive board Member Benoit Coeure said.
“We are going to keep rates close to zero for an extremely long period, whereas the US and the UK will at some point return to a cycle of rate rises.”
It does not take a Nobel laureate to work out that could, over the next months, feed into a lower euro versus the dollar. And anyone who thought the ECB had run out of policy options was disabused of that notion by Governing Council member Erkki Liikanen.
“This is not it yet,” Liikanen said at the Bank of Finland’s quarterly news conference when he was asked about remaining tools in the ECB’s kit. “We have the capacity to act. We can make decisions. This has not changed.”
Across the Atlantic, Fed policymakers have also been putting their own two cents in, to coin a phrase. Dovish Boston Fed chief Eric Rosengren said the US central bank, headed toward an eventual tighter policy stance, could smooth the process by letting its asset portfolio shrink in a predictable and transparent fashion.
Elsewhere, the more hawkish James Bullard, head of the St Louis Fed, said in answer to questions that his main concern was that the Fed might act too slowly in tightening policy and allow a bubble to emerge. One dove and one hawk, setting out views compatible with normalisation of the Fed’s ultra-accommodative policy, even as the ECB is going the opposite way.
The fact that both are non-voters on the policy-setting Federal Reserve Open Market Committee is irrelevant. The Fed will roll out such officials to make a case which does not bind the committee itself.
That’s an elegant use of communications policy to brief the markets while providing a veneer of plausible deniability. All things considered, the message is that the euro may be riding for a fall against the dollar.
