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Why a weaker euro is the price to pay for another "whatever it takes"

By Piero Cingari

17:06, 15 June 2022

Mario Draghi, President of the European Central Bank, ECB addresses the media during the Whatever it takes press conference
EUR/USD falls after a "whatever it takes" remake – Photo: Getty Images

On July 26, 2012, Mario Draghi, then-Governor of the European Central Bank, uttered the fateful words "whatever it takes" to solve the European sovereign debt crisis. At the time, the euro's own existence was at stake, since bond-yield differential (or spreads) between the PIGS (Portugal, Italy, Greece, and Spain) and German Bunds had reached unsustainable levels.

Almost ten years later, the ECB is obliged to patch things up again at an emergency meeting following a week of market turmoil on Italian bonds (BTP). Last week, the ECB's announcement of interest rate hikes beginning in July was enough to spark speculations about the widening of the yield spread between the periphery's most indebted countries and German Bunds.

But, if the ECB truly desires to keep European sovereign bond spreads at bay, a prolonged weakening of the euro (EUR/USD) may be the price to pay. 

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ECB steps in amid BTP-Bund spread concerns

a chart showing the difference in yields between italian sovereign bonds and german bundDifference in yields between Italian and German 10-year sovereign bonds – Photo: Capital.com / Source: Tradingview

ECB emergency meeting: key takeaways

The European Central Bank convened an emergency meeting on June 15 to address renewed fragmentation risks, notably the excessive widening of the spread in yields between Italian and German bonds, which is a key barometer for monitoring financial conditions within the Monetary Union.

The ECB opted to encourage flexibility in reinvesting maturing bonds under the Pandemic Emergency Purchase Programme (PEPP), without giving further details. The PEPP is a scheme designed as a first line of defense to boost the economy during the Covid-19 pandemic. The ECB is also finalising a new anti-fragmentation tool.

The ECB's statement contains a strong and clear message: "the functioning of the monetary policy transmission mechanism is a precondition for the ECB to be able to deliver on its price stability mandate”.

This implies that the ECB aims to ensure that there is no fragmentation in the transmission of monetary policy inside the Eurozone even before considering monetary policy actions under its inflation mandate.

AUD/USD

0.65 Price
-0.730% 1D Chg, %
Long position overnight fee -0.0073%
Short position overnight fee -0.0009%
Overnight fee time 21:00 (UTC)
Spread 0.00006

AUD/USD_zero

0.65 Price
-0.710% 1D Chg, %
Long position overnight fee -0.0073%
Short position overnight fee -0.0009%
Overnight fee time 21:00 (UTC)
Spread 0.00006

EUR/USD

1.08 Price
-0.450% 1D Chg, %
Long position overnight fee -0.0080%
Short position overnight fee -0.0002%
Overnight fee time 21:00 (UTC)
Spread 0.00006

USD/JPY

151.47 Price
+0.090% 1D Chg, %
Long position overnight fee 0.0113%
Short position overnight fee -0.0195%
Overnight fee time 21:00 (UTC)
Spread 0.010

BTP-Bund spread at bay, but what is the price to pay?

The market no longer believes in free lunches these days and carefully considers every step taken by central bankers; recall what happened to the Japanese yen (JPY) as a result of an extremely dovish Bank of Japan.

The spread between the 10-year Italian BTP yield and the German Bund decreased to an intraday low at 2.21% following the ECB's emergency meeting, before rising to 2.27% at the close of today's trading session.

The euro, however, negatively reacted, with the EUR/USD exchange rate trading slightly below the 1.04 mark at 18:30 GMT, ahead of today's Federal Reserve meeting, after reaching an intraday high of 1.05.

The market interpreted the ECB's emergency meeting as a fresh downward catalysts for the euro.

Greater flexibility regarding the reinvestments in the peripheral bonds inevitably implies an ECB ready to respond promptly with new stimulus when spreads widen within the euro area, and this while excluding the extreme scenario of a dissolution of the single currency, on the other hand does nothing but increase monetary policy divergences with the Federal Reserve.

EUR/USD breaks below 1.04

Markets in this article

EUR/USD
EUR/USD
1.07789 USD
-0.00491 -0.450%
USD/JPY
USD/JPY
151.466 USD
0.14 +0.090%

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The difference between trading assets and CFDs
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.
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