It’s interestingly, despite the fact that Mario Draghi provided no clear indication that additional easing is certain, today the EURUSD is -1.0% lower than prior to the ECB meeting. Our view is that the market is not listening to the ECB. They hear the words but show no comprehension of their meaning. Over the past ten years, markets have become so conditioned to get currency debasing easing every time that the inflation outlook deviates from the central bank’s target rate (in this case the ECB’s 2% target).
Despite Draghi’s growing intellectual conflict, broader public disagreement on the effectiveness of the current monetary policy mix and the negative effect of distortion in financial markets, markets are still expected more easing. Financial markets are simply projecting that the ECB must do something and that the action will be euro-negative, as the recent experience with the BoJ has shown currency traders. However, we see central bank policy coming to a reflection point. Gone are the days when policy was expected to drive growth but has now shifted back to being a tool to support growth dynamics. Negative rates were just a step too far for most people. It is only a matter of time before central banks accept the fact that they are not in total control with Victorian-era precision and realize that the cost of doing something does not outweigh the cost of doing nothing.
In 2017, financial markets will need to learn to live in a world where central banks no longer pretend to offer economic salvation.