Jackson Hole and the Euro

Picture of Ben Bernanke, FED ChairmanThe headline on the Wallstreet Journal’s online publication Marketwatch.com reads, “Waiting on Ben”. Ben of course is Ben Bernanke, and I will differ to the site’s assessment of market sentiment. While this certainly might lead one to question how “free” the market is if so much depends on a single speech to be delivered by one man, my focus here are the currency markets.

A somewhat less prominent sentiment is an editorial by MarketWatch’s Washigton Bureau chief, Steve Goldstein entitled, “Bernanke may not be top dog at Jackson Hole”. In it, Goldstein argues that the Federal Reserve’s position is fairly well-known and adjusted for in the markets. Additionally the Fed’s tools are rather restricted: there either will be another round of Quantitive Easing (called QE3) or there won’t. The sentiments of the Foreign Open Market Committee which will make that decision are also evident in the latest minutes.

Goldstein’s point is that the ECB’s measures to alleviate the economic woes of Europe will have a greater effect. It stands to reason, after all: the Euro is a European problem, so the European Central Bank will probably have a greater impact (if I may use alliteration to make a financial point). Goldstein openly wonders if the president of the ECB will announce any new measures until Sept. 6th.

Mario Draghi, President of the ECB

What everyone is waiting for is the traditional speech the Chairman of the Federal Reserve gives at the end of the month in Jackson Hole, Wyoming. It’s an important date, because that was the occasion Bernanke chose to announce the last round of Quantitive Easing (QE2). Mario Draghi, the president of the European Central Bank, will be giving a speech a day later.

Graph of the Euro verus the US Dollar

Graph of the Euro versus the US Dollar (lower line) compared to net shorts (upperline) with the day before Draghi’s intervention marked. Net shorts indicate the position of investors expecting the currency to depreciate over time. (Click to enlarge.)

Here’s the thing though (and where we wander off into speculation): Draghi has managed to influence the markets with comments and proposals. However, those proposals haven’t been followed up by action. Unlike the Federal Reserve, whose legal mandate and jurisdiction are well practiced, this is completely unknown territory for the ECB. Since it depends on the acquiescence of 17 independent and still mostly sovereign nations, the scope of ECB action is often defined more by politics and differing legal conventions than what might be the best economic interests of Europe. Thus, it’s unlikely Draghi will be able to do more than speak, at least until the resolution of Germany’s Constitutional Court on it’s nation’s ability to supply more money for further Eurozone action.

While we can assume that the Constitutional Court will probably base it’s decision on legal precedent, the same cannot be said of the German executive branch. Angela Merkel, Germany’s Chancellor, is a politician, when it’s all said and done. Her country, being the largest and with the most stable and forward-reaching economic policies, plays the key role in deciding what measures the ECB will be able to carry out. The question is, how much of that decision is going to be with an eye on next year’s general elections?


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