The U.S. Dollar continued to rise overnight as markets reacted in favor of the greenback after the European Central Bank’s move to extend its monetary easing. While the ECB lowered the amount in purchases per month from 80Billion to 60Billion, it prolonged the injection into the economy another 9 months.
More importantly, ECB President Mario Draghi once again rang the bell asking for governments to simply step up. For a while since the crisis, central banks have fomented loosening credit, but without actual spending measures, fiscal policy, there are no projects being funded. Austerity elsewhere keeps the dollar strong regardless of any prospect of altering trade agreements down the line.
Equity markets are calmer as they get a clearer picture of what is to come next year. ECB action will be priced in by traders. The biggest risk event left is the December 14th FOMC meeting, last chance for the Fed to actually hike its benchmark interest rate. This year has been full of surprises and counter-intuitive occurrences, but if Yellen and the Feds delay the move it would create such a shock our heads might spin. Chances stand at 100%.
The Euro fell, big league, as result of the changes to the QE program extending purchases all the way out to December 2017. The Italian referendum was mostly ignored by traders as they expected Prime Minister Matteo Renzi’s initiative to reform the constitution to be shut down. However, Renzi is now pushing to maintain the job he vowed to leave if the votes didn’t go his way. Euro fell by over 2.0% this week.
Instability in Italian politics is not a huge shocker, but the struggle to reach consensus within European Union member nations is alarming. As we enter 2017, the Euro may depreciate further on Brexit process complications as well as key elections that could dramatically change the decision makers whose task will be to try keeping the EU together or push for separation, which many are campaigning towards and gaining momentum from.
The Yen is weakening ahead of its Bank of Japan meeting on December 20th as global markets continue to flourish, including major gains for the hometown NIKKEI. Thus far this week, Yen lost close to 1.5% of its value in the midst of heavy risk-appetite bringing it down to its lowest level in 10 months.
Additionally, Japan’s Gross Domestic Product growth is slow and for an export-driven economy, it is crucial that the Yen is competitive. Every BOJ meeting of 2016 led to Yen appreciation even when not intended, but a need for lending and a likely call to action aimed at Prime Minister Shinzo Abe to spend may lead to the next gathering being an exception to the counter-intuitive trend we’ve seen this year for JPY.