Is the ECB fooling us

Equity markets had a good start to the second quarter, boosted initially by the Federal Reserve Chair's pledge to continue “extraordinary support” for the US economy “for some time to come”. The results of the Takan survey we referred to on Monday were described by CNBC as “showing Japanese corporate sentiment improving slightly in the first quarter, ahead of the introduction of the new consumption tax". The Nikkei index finished the day little changed. In Europe, the manufacturing data came in pretty much in line with expectations, still suggesting the economy is expanding moderately. What remains stubbornly high is the unemployment rate at 11.9%.

Speculation continues to grow ahead of Thursday's rate decision meeting that the ECB is going to announce its form of QE. That speculation has grown after Monday’s inflation data and comments from Jens Weidmann, a European Central Bank member and Governor of Germany's central bank, that the ECB had not ruled out the idea of asset purchases. One has to be suspicious its more "talk talk" to quote Mr Munchau by the ECB, but it will strengthen the expectation amongst investors it could happen if they believe Germany is no longer totally opposed to the idea.

What is worth noting though, is that despite the Federal Reserve tapering and the increased speculation the ECB could introduce QE, the euro has hardly moved all year against the US dollar. Ahead of Thursday’s meeting the euro has even rallied slightly against the US dollar. We would have expected the euro to be under a bit more pressure if the currency markets were anticipating the ECB were about to announce either negative interest rates or QE.

One currency that has started to weaken against the US dollar is the Japanese yen. Perhaps that is where the speculators are looking for the next dose of monetary stimulus.

Posted on April 2, 2014 .