Too much power for Draghi?

Too much power for Draghi?

Good morning and welcome to today’s foreign exchange market commentary on Wednesday, the 31th of October.

Federal Reserve chairman Ben Bernanke could very well be touted as the most powerful person in the financial world. The governors of Bank of Japan and People’s Bank of China can also stake fair claims. But going by recent developments, the Italian president of the European Central Bank Mario Draghi is set to beat them if measured by what they can actually do.

In the recent past, the authority of the ECB has expanded extraordinarily. Apart from setting interest rates and sprinkling liquidity through its LTRO programs, it can dictate spending terms and taxes in the world’s largest economic bloc. And there are reasons to be worried. Too much power without any accountability can be catastrophic.

After pledging to do whatever it takes to save the euro in summers, Draghi took a raft of measures to put himself firmly in charge. By announcing the OMT where the ECB could step in and buy bonds of countries that ran into trouble, the central bank ensured it could control financing of national governments across the continent. Countries would have to negotiate with ECB officials on issues such as deciding pension and welfare payments, tax rates, state spending programs and labour laws.

The next step, taken at a low key meeting two weeks back, puts the ECB as the lead regulator of the proposed banking union that is set to become operational in January 2013. The financial markets in the 17-member currency union can’t move without Frankfurt’s nod.

That suddenly looks like an awful lot. Ben Bernanke can’t decide if California’s labour laws are too strict or if Florida should spend more on infrastructure. The powers of the governors of BoE and BoJ are small in comparison, both can only print money and set interest rates.

True, if not given authority, the single currency would fall apart like a house of cards. And probably it’s a better option than doing nothing.

But there are a couple of problems. First, the ECB is far away from most markets except for Germany. Worst still, it lacks experience in regulation to deal with clever bankers who move fast and plays with rules all the time.

It’s difficult to decide on public spending in faraway markets such a Nicosia. The ECB’s own forecasting abilities are not that good as well. It was raising interest rates only last year when the region was heading into recession.

Second, the central bank has no accountability and is answerable to none. It is unlikely people will accept a bank in Frankfurt that take major life-impacting decisions for whom they have not voted. Let’s hope the eurozone is not creating bigger problems for the future as it fixes the current one.


GBP/EURO – 1.2398
GBP/US$ – 1.6086
GBP/CHF – 1.4982
GBP/CAN$ – 1.6064
GBP/AUS$ – 1.5502
GBP/ZAR – 13.8721
GBP/JPY – 128.28
GBP/HKD – 12.4712
GBP/NZD – 1.9582
GBP/SEK – 10.6694

EUR: The single currency made some gains yesterday after reports suggested Spanish GDP contracted by 0.3 percent vs. expectations of a 0.4 percent drop. Yields on the benchmark 10-year Italian bonds also fell, giving further boost to the euro. The EUR/USD pair surged to a high of 1.2980 yesterday afternoon after Greek President announced internal negotiations to meet the strict conditions laid out by the ‘troika’ – the EC, the ECB and the IMF, have been completed for securing additional bailout funds. This theoretically diminishes possibilities of Athens’ exit from the currency union although we have to wait for the ‘troika’ report before making further comments. Better-than-expected German retail sales data has helped the euro today morning with the EUR/USD trading around the 1.3000 level. The euro has clawed back yesterday’s losses against the sterling and the GBP/EUR pair opens at 1.2395 this morning.

USD: The cable continues to trade range-bound between 1.6050 and 1.6090 over the past 24 hours due to the lack of activities. US markets remained closed in the aftermath of Hurricane Sandy and sterling moved higher after UK retail sales for October came in well above forecasts hitting a four-month high, boosting hopes that the economy is emerging from recession. The euphoria however was tempered after UK GfK Consumer Confidence printed below expectations overnight. The economic data calendar is light on the ground today and the USD may gain on month end flows. The GBP/USD pair opens at 1.6080 today morning.

Have a great day!


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