Market commentary: Merry Christmas and thank you Mr Draghi

2015 has been a year of excess; excess oil, excess supply of commodities, excess terrorism and even excess global temperatures currently leaving some alpine ski resorts without snow! It has also been a year of excess monetary supply in the euro area, and after European Central Bank President Mario Draghi extended monetary stimulus last week, some strategists have come to the conclusion he’s done enough to revive the economy with policies that helped push the euro down about 10 percent versus the dollar this year.

The outlook for the shared currency in 2016 is mixed, however the majority are still subscribing to the thought that the diverging monetary policies between the Fed and the ECB will result in the further devaluation of the euro; a Bloomberg consensus forecasted a 4% devaluation against the dollar. The higher yields in the U.S. and a greater negative yield on the euro affecting the demand and supply for the relevant currencies is cited as being the basis for the trade.

The pace of the decline is expected to be a lot less significant, as the latest data on jobs, manufacturing and inflation show the weaker euro is already starting to benefit the economy. The currency has given up some of its gains since Dec. 3, when the reboot of Draghi’s bond-buying plan fell short of investors’ expectations. At this point, we are left begging the question whether this is the start to the end of monetary stimulus by the ECB?

Draghi had built up investor’ expectations by saying on the 20th November that the institution will do what’s necessary to spur inflation. That surge masked his overall success in driving the currency down in a period during which central banks took turns deepening stimulus measures.

As a result a weaker currency pushed up the price of imports, helping the central bank’s efforts to boost the region’s inflation rate which, at 0.2 percent, is still just a fraction of its goal of just under 2 percent. At this point, given the subdued inflation rate I find it very difficult to believe that Draghi will hang up his boots in 2016, however given the already generous monetary environment we are currently operating in, the scale and effectiveness of further interventions becomes questionable. Trading in 2016 could very well be the case of buy the rumour sell the news.

Reports on 16 December showed inflation in the currency bloc unexpectedly accelerated in November while manufacturing grew this month at a faster pace than economists predicted.

The difference between today and this time last year is that you could get away with the idea that Europe was struggling and that the euro was too strong, however the economic situation is different and some argue that the euro is at a level where it’s cheap enough so there is no motivation for the euro to be forced even lower by the ECB.

This article was issued by Simon Psaila, Treasury Officer at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.