Do Not Forget ECB And Draghi This Weekend

Includes: FXE, UDN, UUP
by: Dean Popplewell

By Dean Popplewell

Not many people have realized that the ECB is about to have its own version of the Fed's Jackson Hole forum this weekend.

It will start on Sunday May 27th and will end next Tuesday May 29th. This will be an annual Forum on Central Banking and will include government officials, central bank governors, academics, journalists and financial market representatives, exchanging views on current policy issues. The first such forum will take place in Sintra, Portugal, Sunday-Tuesday.

Draghi will give the welcoming address on Sunday evening and an introductory speech on Monday morning. He will also speak in the closing event on Tuesday afternoon.

The previous Fed Chairman Ben Bernanke did use the Jackson Hole Forum in the past to flag policy changes (such as QE2 in 2010).

Is it possible that Draghi could do the same, particularly if he wants to make the first Forum an event to remember?

The majority of the market expects some kind of easing from the ECB on June 5th. Dealers are focusing on the potential for the central bank's first dip into a negative deposit rate. The move is expected to penalize banks for "parking their excess cash" with the ECB. The potential knock on effect is to make EUR-dominated deposits less attractive, again weakening the exchange rate.

To date, most of the EUR's appreciation this year has to do with investor's confidence returning towards the eurozone. The market has been an avid buyer of European assets - particularly euro-periphery bonds. Further monetary easing could be seen "as addressing the problem of fragmentation, and would actually improve the prospects for the peripheries." This could lead to further buying of euro-assets and support the EUR.

This weekend's ECB soiree could be a game changer. Depending on how open and aggressive Draghi will be, throw in the holiday Monday on either side of the Atlantic could give us some volatility. Lack of liquidity will make some of the currency moves very interesting. Expect the SNB (EUR/CHF 1.2215) and the BoJ (USD/JPY 101.77) to be watching intently.