Mario can't drag down the euro

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Welcome to Hard Currency, the weekly podcast of the Financial Times that delves into the world of foreign exchange. I'm Roger Blitz and this week has all been about the European Central Bank meeting, the rise of the euro, and the timetable of President Mario Draghi for taking the ECB's foot off monetary stimulus. With me to look at all of this is Max Kettner, cross strategist at Commerzbank.

Max, welcome. This time last week, the euro was about to break $1.20. We've had the meeting. That's where the euro still is. So what did we learn from what Mario Draghi told us?

Hello, Roger. I think what we learned is also what we see in the euro dollar exchange rate right now. We were breaking through the $1.20 temporarily. I think the most significant thing that we learned-- and there is really, two parts about it-- is one is a bit of a more hawkish element. The hawkish element being that inflation forecasts have only really been revised downwards not really significantly but rather really only cosmetically.

And the second bit, I think, was that he obviously said a lot of times, OK, the exchange rate is some kind of uncertainty and we're monitoring it closely. Contrary to, I would say, the last press conference, he mentioned it quite a few times.

Big question. Was he trying to talk down the euro?

Well, I think partly, he was. But I think the forecasts, the projections of the ECB are just simply not dovish enough for that to work. So I think when you look at the forecast both on a GDP and particularly on the inflation basis, that was by no means enough to talk the euro down. So you can obviously refer to the exchange rate. You can also refer to exchange rate volatility, what he has done, which is higher, which actually is not really that true. It is off the lows. Let's just say it is not ultralow anymore. But there wasn't really exchange rate volatility. It's not about the volatility and effects markets at the moment. It's about the level of the euro, not about the volatility.

So from that point of view, I think, yes, he was trying to talk it down a little. It didn't work simply because I think the projections didn't really back it up.

Yes. They talked about this horrible word-- exogenous factors-- which basically means anything not to do with the ECB or the eurozone, which could be as long and as broad as you want, I suppose. I mean, even just the fact that there are rumours about the euro and what the ECB might say could be interpreted as an exogenous factor. So it leaves the ECB quite, I think, flexible, doesn't it?

Absolutely. I think it gives them the maximum leeway and the maximum flexibility. I think the word exogenous can be everything. Completely agree with you. It can even be something like, oh, emerging market spreads are widening. Therefore, we think demand from EM is going to fall and therefore, we think GDP might not grow by such a rate that we expect in the last meeting, for example. It might be everything. It might be even then some hurricane in the US is dampening growth and that might even feed through into the eurozone. Geopolitically, it might be some global factors. We don't know. But it leaves them, as you said, the maximum flexibility.

And there was lots of discussion, you talked about, the preliminary discussions on the council about the October meeting. Preparing for, saying what we're going to do about asset purchases next year. Of course, you could turn around and next month and say we're sticking to what we're doing. Did you get any hint that this is walking the market towards what the market is now expecting?

I think so. Yeah. He was he was pretty direct in saying, OK, it's going to be October where we learn most of the details. I think the preliminary was basically for the market to take it as a hint, OK, it is going to be during the next meeting. I think the only really possible way that this is not going to be October is probably where you have, as we just discussed, some exogenous, really unexpected jock.

Let's stop using that word.

But I think at the current stage, at the current juncture, we can't really foresee that.

No. Therefore the market, if it's in control of the euro rather than the ECB being in control of it, where is it going to take the euro to?

So now, we're about around $1.20. And I personally thought the initial reaction of euro was a bit too strong. I think just because we have just some cosmetic changes in the inflation projections. And still having Draghi trying to talk the euro down. And still, the euro was rising above more than 1%. I think that was a bit too much. But again, it was not only a euro picture. That is something we might may not forget. What we are doing right now is we're only talking of the last couple weeks. We're only really talking about the euro. There's a certain second like the dollar.

In fact, it may be quiet on the ECB front until that October meeting. And therefore, other factors come into it. We have had a couple of very significant factors this week. Stanley Fischer has announced his resignation. And Hurricane Irma is possibly going to have a big impact on US numbers. What do you think of those two factors?

I think first one, Stanley Fischer, is absolutely introducing another unexpected element of--

This is Janet Yellen's vice chair. The very hawkish member of the Fed.

I think that's, again, a sort of unexpected element of uncertainty, which clearly, the US dollar cannot need at the moment. That's something really ultra lows in the US dollar index. This is something that is not going to help the dollar, obviously. It is just with also some other [INAUDIBLE] of the FOMC not really being filled at the moment. So it is introducing another element of uncertainty.

And the second one from the data perspective, I think what we've seen today as well during the ECB press conference, was we have had much, much, much larger number in unemployment claims in the US. Initial unemployment claims because of the hurricane. That is something that obviously, we also saw, for example, in 2005 with Hurricane Katrina. We had a temporary spike in unemployment claims. We've had a temporary decline in consumer confidence. I don't think the market has that on the course so far.

Not yet.

Not yet. And that is again, introducing an element of uncertainty, an element of potential negative surprise for the US dollar leg. Which sort of keeps the upside in the very, very short term of let's say the next couple of weeks relatively limited, I think, for the US dollar.

The other big surprise this week was the Bank of Canada. People expected them to go in October. That's when the next big monetary policy report was coming out. But here they decided to go for another overnight rate rise.

I think the question is, are they going to be proved right?

From an inflation perspective, that's going to be an interesting question because obviously, the much, much stronger Canadian dollar now is probably going to weigh on inflation. And that is a picture more for, let's say, 2018. Because it needs time to feed it through.

Let's say from a perspective of growth and from a perspective that you have economies like the US economy, the Canadian economy, and Europe, it's probably Sweden on a much, much later stage of the cycle. It may prove to be right from, let's say, a perspective that they have some power to cut rates before all the others can do when they experienced the first downturn. Purely from an inflation perspective, I'm not so sure whether that will prove right.

Right. OK. It does feel like it's back to school this week. Various congress and various parliaments coming back, as well. How was your August, by the way? Did you get away or were you here most of the time?

I was here most of the time. I was one of the poor ones at the desk.

For those who weren't around in August, what did we learn about what August did to the markets? What was your takeaway?

I think the takeaway, apart from these temporary spikes of equity, volatility, in particular because of North Korea, because of Trump, obviously, that is something that probably catches the eye first. So for those people who just came back to the desk, that's probably the first thing. Apart from that, I think what we have learned is regarding those spikes in volatility, the magnitude of these spikes in volatility is much, much smaller. So much smaller than, let's say, a year ago, for example. So let's say the temporary panic mode of markets are much less drastic and much more short lived. That's one thing.

And it tells you also what has worked over the summer. It basically tells you when you have an environment where there is not substantial news for inflation, not substantial news for growth, both on the up or the downside, what you do as an investor from a cross asset perspective, be it rates, be it affects, be it equities, basically, you buy momentum. You look at what has worked since the start of the year.

[INAUDIBLE]

Which is something like EM local debt. Which is something like some EM currencies. It's long euro, obviously. So it's all these kind of traits. In the equity space, it is something like US equities long versus eurozone equities long, particularly driven from effects. But within the equities space, it's also something like large and small caps of value versus growth. Those are trends that have worked since the start of the year. And if there is no substantial change in the inflation or the growth picture from a global perspective, as an investor, there is no real basis for changing a view.

Stick to what you know and what you see. My thanks to Max Kettner of Commerzbank. We'll see if that prevails next week when there's lots of data to digest and a Bank of England policy decision as well. Join us again for Hard Currency. Goodbye.