Kuroda no Template for Draghi

Euro recovers ground after an initial dip driven by Draghi’s accentuating the long term nature of contained inflation expectations and removal of projections to any stabilisation for the first half of the year. Both these elements have increased expectations of an ECB rate cut to take part towards the end of this quarter.

On growth
Since the quarterly forecasts were issued last month, then ECB relied on its wording at this month’s conference to signal prolonged weakness into early summer. Here is the paragraph on growth compared to the March press conference.

“The decline was largely due to a fall in domestic demand but also reflected a drop in exports. Recent data and indicators confirm that the economic weakness extended into the early part of the year. Looking forward, euro area export growth should benefit from a recovery in global demand and our monetary policy stance should contribute to support domestic demand.”

On Inflation

Apr 4, 2013 Conference:
“…inflation expectations remained in line with price stability over the medium to long term”

Mar 7, 2013 Conference:
“…inflation expectations remained in line with price stability over the medium term”.

Euro: Resilient but Dubious
EUR/USD continues to show resilience despite deteriorating growth dynamics, prolonged uncertainty in Cyprus and lingering impasse in Italian politics. The only positive aspect in EUR/USD technicals is that monthly trendline extending from the July low remains intact. A monthly close below 1.2800 is required in order for the breakdown to occur.

Looking ahead, however, medium term dynamics remain dubious at best as seen in the momentum indicators. These oscillators suggest that any recovery above 1.29 will likely be capped near 1.2930s (two-month trendline resistance), before a gradual return towards 1.2710. Thus, the 1.27-1.2940 territory is not going anywhere soon.

Kuroda is no Template for Draghi
The Bank of Japan has not only changed the definition of price stability, but also redefined monetary policy easing; aiming to double its monetary base from ¥135 trn to ¥270 trn within two years; raising the average maturity of JGBs to seven years from three years—all via a monthly expansion of its balance sheet to the tune of 1.1% of GDP—compared to 0.5% of GDP by the Fed ($85 bn). This will also mean the official removal of the Bank note policy, which requires that total asset purchases by the central bank may not exceed total bank notes in circulation.

The road to 102.00 in USD/JPY remains intact.