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Clik here to view.It has certainly been an eventful start of the year for the financial markets, and for FX in particular.
The Swiss National Bank’s decision to pull the rug from under its floor in the euro against the Swiss franc got the ball rolling, while the European Central Bank’s (ECB) announcement that it was going to engage in potentially unlimited quantitative easing (QE) came just a week later.
Two announcements, and two rather different reactions, with the havoc caused by Zurich followed by a sense of relief as Frankfurt over delivered on what were pretty well flagged intentions that it was going to fire up the printing presses. The fact that the speed and size of its bond purchases – at €60 billion a month – exceeded what had been leaked to the press in the run up to the announcement meant the euro was able to continue on a fairly orderly downward trend. And that trend is going to be important for the prospects of the eurozone.
Reluctance among some ECB officials to adopt QE – usually for fear of monetising government debt and creating moral hazard – has kept the central bank consistently behind the curve in recent years, not only in the fight against deflation in the eurozone but also in relation to its peers in the US and UK. Buying government bonds, potentially without limit, marks an important turning point in the ECB’s strategy therefore. It not only breaks a restrictive taboo, but it should also allow the central bank to deliver a meaningful expansion in its balance sheet.
But, as analysts note, while QE was relatively successful in the US and the UK, it could prove less powerful in the eurozone. That is because Europe’s financial system is based around banks rather than capital markets, so the spill-over to the real economy should, they say, be more modest. Furthermore, wealth effects are also weaker in the eurozone, reflecting smaller equity holdings and a lower marginal propensity to consume.
