In a short term, the euro is dumped too much

Since Mario Draghi, the governor of the ECB, mentioned the possibility of financial easing next month, EUR/USD has been dropped from 1.40 to now around 1.36, although it could be too much to fall.

As is mentioned in the recent post, if the ECB increases the monetary base by 20-50%, the due rate of EUR/USD is 1.34-1.28, and therefore the current rate already half reflects the QE that increases the monetary base by 20%. At the moment, however, nobody rumours about the QE next month, whilst people around the ECB are discussing the negative interest rate. Merely for the interest rate cut, the recent fall of the euro should be said to be a bit too much.

Even in case of the QE next month, we could hardly expect the massive QE that increases the monetary base by about 50%. When the ECB did the LTROs (Long-term refinancing operations), for example, it was politically easy to convince Germans because the LTROs were to deal with the euro zone crisis. Meanwhile, the bad effect of deflation isn’t so apparent to nations who aren’t familiar with economics, and therefore the QE is relatively difficult in terms of politics. In such a situation, the size of the QE would be just around 20-30% of the monetary base if they could start it.

Realistically speaking, the ECB will cut the rate next month. Nevertheless, Draghi should be thinking it’s attractive to watch for a couple of months the influence of his speech that effectively had the euro dropped. Thus, we should note that it’s also possible for him to do nothing next month but giving a stronger attitude.

In conclusion, we suggest the investors with a short position of the euro to think to close the position once, to wait for a better opportunity to come. If EUR/USD comes to 1.35, it’s also a real option to buy the euro expecting the ECB won’t start the QE. In this case, it’s also recommended to be long the property companies of the major cities in the euro zone, such as Gecina (see the recent post), to hedge the risk of the QE next month just in case. It wouldn’t be a bad trade.