The European Central Bank just plunged its deposit rate further into negative territory, from -0.20% to -0.30%. Just ahead of the announcement, the Financial Times tweeted out a false report that the ECB had shocked markets and held rates, sending the euro spiking. A bigger-than-expected package might send the euro south against the dollar, while a disappointment might cause it to strengthen. Goldman Sachs is one of a number of institutions expecting the single currency to drop to parity with the dollar by the end of December. http://www.businessinsider.com/here-comes-mario-get-ready-for-the-ecbs-massive-meeting-2015-12
true, but you never know how much is priced in. Could be interesting if EU goes one way and USA goes another, especially for all those who claim USA is in bubble due to QE.
In a world of fiat currencies it is the relative values of our trading partners' currencies to the dollar that counts. Neither the ECB or the Fed will let the EUR/USD ratio swing too far in one direction or the other from parity. If you look at the maximum value of this ratio over, say, the past 45 years, you wouldn't expect either USD/EUR or EUR/USD to trade much outside that maximum. I said many months ago that the Euro was headed toward parity with the dollar. In the subsequent round of QE I would expect the ratio to invert some and the dollar to trade above one relative to the Euro. How is it that I could be so sure of that, and that Draghi would eventually find a way despite German opposition. It's because QE works, and it is compatible with human nature. You never want to go against human nature. The most successful politicians recognize this intuitively. Draghi was at MIT at the same time Bernanke was there. They had similar influences as students. I see that they think a lot alike -- two exceedingly well trained, very experienced, and highly competent CB heads.
spoken like a true anti Kenseyan, "The market will always behave rationally." Like the man said, "I have 6 rules for trading forex." And then I had six positions on and no rules.
The market reflects the irrational nature of people, rather than the way people are presumed to act according to economics text books. I goofed when I wrote consider the EUR/USD ratio over the past 45 years. That's nonsense. I should have said over the past ~16 years. that would make much more sense , since the euro wasn't adopted until sometime in 1999.
If the FED does hike and Drahgi did do more to further negate the ECB deposit rate AND further negate euro-land debt in amplitude and duration by expanding QE further then the rate differentials between the two areas may have been a little too much. Tin hat firmly planted , maybe Drahgi and Yellin and other world leaders actually discuss these issues and agree that USD strength going forward may a greater deflationary force than is some soft data from Europe. Why would not Drahgi have walked back the 45 day old rhetoric of expanded QE? Surprising.