What The ECB's Monetary Easing Means For The Markets

Includes: ERO
by: Dzhafer Medzhakhed

It is surprising to notice how little coverage was given to some key declarations of Nicolas Sarkozy after the euro summit of October 26. Asked what the ECB will do while the new EFSF agreements will be finalized and put in place, Sarkozy answered by explaining that the ECB (Mario Draghi) will simply be buying government bonds to cool down the panic. The exact statement of Mario Draghi that Sarkozy refers to goes like this:

There are circumstances when non-conventional actions, like the purchase of public debt...are necessary … to pacify the markets.

It is not even clear if this “pacification” will stop once the upgraded EFSF is in place. It is also very interesting to notice how Sarkozy insists on the fact that the ECB is an independent institution and that nobody forced the ECB to take such a decision. Trichet was clearly opposed to this practice, and strongly limited such actions. Trichet was the banker of the Germans (of the strong euro). Draghi seems already to be the banker of the Latins (of the weak euro). For Merkel, it is much easier politically to let the “independent” Draghi take the heat for the money printing, then go to parliament and ask for a trillion euro. Moreover, Merkel could use the excuse of an ECB out of control to exit the euro when the time comes.

In addition to this, given the ongoing slowdown in European economies, we can be sure that at the ECB meeting on November 3, Mario Draghi will correct the mistakes of Trichet, and move the interest rate down. Once the current rally stops, we expect the EUR/USD to go below 1.30 in a matter of weeks.

Disclosure: I am short SPY, long USD