ECB PREVIEW: China’s Dragon Spits Fire on ECB Targets

W B P Online:

With the euro off lows and more importantly oil prices at 12-year lows, December’s QE extension looks very dovish and it will take a very, very strong “whatever it takes” to get inflation back to the target from ECB President Mario Draghi, not only after the Governing Council meeting in Frankfurt, but also over the weekend in Davos, where the world’s high-flyers meet for the annual economic conference.

Frankfurt – The gods must all be against Mario Draghi and his knights in their anti-deflation war-march in the euro zone. Not only was December’s monetary arsenal extension largely ignored by markets, but now the energy market waters have become even more turbulent and China’s Dragon has awoken, spitting sulfur and fire on Draghi’s efforts.

The majority of economists and market participants now think the European Central Bank (ECB) is set to prolong or/and extend its asset purchasing in tandem with another deposit rate cut, a move seen at the beginning of December last year.

As evidenced by the foreign exchange markets, Draghi waited too long with a quantitative easing extension that should have originally been announced in Malta last October. Moreover, once delivered, the markets took an immediate opposite reaction to that expected by the ECB, sending the bank a signal that its action was just too little, too late.

Instead of selling euros, traders bought euros in droves, pushing its exchange rate against the US dollar 3.06% higher within a single day, making it the second-largest single day appreciation in the currency’s 17 year history.

On top of that, oil prices have dived to fresh 12-years lows and China has, once again, made it into the spotlight with its almost 20% equity market fall, pushing world equity markets deeply into negative.

Now it really looks like whatever the ECB is doing, it always gets it wrong.

Targeting inflation of 2% and forecasting low oil prices and low aggregate demand at the same time leaves the ECB with very little gunpowder at their disposal.

“As the euro zone currently seems to be in the calm eye of the current storm, and Draghi already had problems uniting the ECB for the December decision, we believe the ECB will keep dry the little powder it has left– at least for this week,” Carsten Brzeski from ING wrote in a note before the ECB meeting.

No matter how much government or municipal bonds you buy, with oil prices below $30 a barrel, there is nothing to be done, except keep persuading journalists and market players that should things get even worse, you stand ready to act.