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Both the Fed and ECB Will Swing Into Action Before Year's End

Both the Fed and ECB Will Swing Into Action Before Year's End
(Dollar Photo Club)

By    |   Friday, 23 October 2015 10:44 AM

ECB President Mario Draghi didn’t disappoint all those investors, including me, who expected a dovish statement at his news conference when he explained the ECB’s latest monetary-policy decisions.

At the moment of his news conference, it was practically impossible he had knowledge of the statements of Jean-Claude Juncker the president of the European Commission, that were published in the afternoon, and after the ECB press conference.

In the U.K. daily The Telegraph, Juncker was quoted as saying: “The European Union faces long-term economic decline and the ‘love affair’ of integration is at risk … economically, we see the end of Europe’s glorious years compared with what others are doing … The European Union is not going very well and so we must ensure that we keep alive the ambitions, hopes and dreams of Europe.”

This is, of course, a political statement, but for investors who are interested in having part of their investments in the EU, Juncker’s statements should be seen as a very serious warning from the highest-ranked executive of the European Commission that a new crisis-wave in the EU is probably on its way. Let's hope not.

“The risks to the euro area growth outlook remain on the downside, reflecting in particular the heightened uncertainties regarding developments in emerging market economies, which have the potential to further weigh on global growth and foreign demand for euro area exports,” Draghi said.

Interestingly, when Draghi said, “further lowering of the deposit facility rate was indeed discussed, and it's one of the instruments of monetary policy that I referred to when I said all instruments have been discussed,” the euro tanked dramatically, especially against the dollar.

Remember, the ECB applied its first a negative deposit facility interest rate of -0.10 percent on June 11, 2014, which was then increased to negative -0.20 percent on Sept. 10, 2014.

Finally, when Draghi said, “… one of the downside risks to our inflation projections comes from the exchange rate. As I've said before, the nominal effective exchange rate has been appreciating over the last few months – four, five months – to a somewhat significant level…,” he made it clear a weaker euro is more than “desirable” for the ECB to comply with its mandate of an inflation rate of close to, but lower than, 2 percent.

All this brings us to what could become an exceptional month of December, where we could see the Fed start to raise rates while the ECB probably will extend various levels of its QE undertaking.

In case this occurs, we could finally get a more or less formalization of the divergent monetary trends between the Fed and the ECB that have been under way for a while, but that have been negated by the markets as of lately.

There is a good chance the ECB will ease on December 3 and the Fed will start raising the fed-funds rate two weeks later on December 17.

Investors should expect that in 2016, we probably will see a substantially weaker euro and a more expensive U.S. dollar.

If the Standard Bank forecasts it released are right, then within 1 year we could expect parity between the euro and the dollar and within 2 years $0.95 would buy 1 euro.

Expect a stronger dollar as well as a weaker euro for longer than we anticipated.

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The ECB will ease on December 3 and the Fed will start raising the fed-funds rate two weeks later on December 17.
dollar, euro, invest, currency
Friday, 23 October 2015 10:44 AM
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