European Remake of QE or Euro Saturation

The intensity of EUR/USD fall decreased significantly, since the pair came to the global support levels
Present day market of oil prices that collapsed demonstrates the situation when even a very strong local foundation is not able to protect from deterioration of foreign trade, decline of export, slowing down of inflation or GDP growth. The currencies of countries that are net importers are becoming front runners and the currencies of the countries that are net suppliers (rouble, Canadian dollar, Norvegian krone) are becoming victims. At the same time, low oil prices not only help improve the economy of Asian countries (China, Indis, and Indonesia) but also serve as a serious factor of dollar influence on euro, since the fall of prices for energy resourses put pressure on the European inflation. The risk of further decrease can drop inflation to zero or completely take it to the negative zone. Currently, against the background of the decrease of prices for Brent oil by 27% during this year, there are signals of consumer confidence increase and growth of business confidence, which gives a hope for improving of the general condition of the European economy.

Dependance of inflation expectations from oil is significant for the market generally, and for final consumers, since inflation, in general, is perceived through necessary consumption (for instance, fuel). It is probably going to be a long way to the recovery of prices for raw materials, but it is now that ECB needs to find a balance between smilulating growth and the negative influece of oil on inflation. The main currency is in a new phase of economic disbalance that can be called euro saturation - continuous influx of currency under general weakness of economy, high unemployment rate, and all-time high proficit of payment balance. A surplus of savings exceeds investment capacities too much (approximately, by 230 bln. dollars per year), which means that Europe has problems of domestic and not external demand. In this situation, dramatic weakening of currency will become a political step, but will provide the expected economic recovery. The standard methods of QE are ineffective for Europe, but QE will be used by all means, since ECB has no other variants at this point. The Central Bank program has no effective measures for stimulation of customer demand, and it has nothing else left except lowering interest rates.

The process of buying assets can last until the end of 2017, and within all that period, euro will be weakening against dollar until the level which is below parity. In the result, a surplus of European bank accounts under low real interest rates along with soft policy of ECB will generate internal deficit of assets and will cause the largest export of capital. Expectations of the following series of the Central Bank easing policy program keep on putting pressure on the main currency. The growth of banks' interest to the programs regarding real sector crediting will, by all means, cause demand for LTRO by the end of the year. That will lead to the desired increase of ECB balance and will dramatically decrease the probability of purchase of state bonds in the framework of the European QE. The LTRO target program, which is already traditional for Eurozone, is built on the British principle of FLS (funding for lending scheme), which usually led to pound/dollar rate growth. That exactly scenario is being placed in quotes by large investors, which can cause growth of euro in case of ECB's passivity.

Owing to Draghi's dynamic and soft rhetoric, ECB meeting during this week will pose as the last risk factor for euro. The plans inlcude the information regarding purchase of sovereign bonds, it is possible to hear about particular amounts and periods. The change of key rates is unlikely, global decisions can be rescheduled to the first quarter of the following year. The plans for TLTRO soft bank lending will be announced on next Thursday, December 11, and until then, PMI indexes may create the general mood.

The intensity of EUR/USD fall decreased significantly, since the pair came to the global support levels. It is recommended to wait for detailed information from currency officials before initiating speculative sell-offs with targets below 1.2360 and then to get involved in pre-New Year rally.

Author: Navsher Bartash,
ForexChief Currency strategist