Europe before the launch of QE

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Mikio Kumada (pictured), global strategist at LGT Capital Partners comments on the impact of the European Central Bank (ECB’) QE programme, which is set to be launched this week.

The ECB is stet to formally launch its program of quantitative easing (QE) in the coming days. With the program’s key parameters already widely known, its impact might seem to be largely “priced-in” by now. Still, Europe’s should not be underestimated.

A comparison with the Japanese yen’s trading patterns two year ago, and the sheer size of the ECB’s QE suggest that the longer-term devaluation process is still far from over for the euro. Tomorrow, ECB is expected to communicate further details and procedures of its QE program, which was officially announced on 22 January.

Unless the central bank unexpectedly comes up with additional easing steps at, which we do not view as likely, financial markets would seem to have by now largely priced in this development, at least for the time being.

Nevertheless, in the bigger picture, the euro maintains a significant devaluation potential against most other major currencies.

Accelerated depreciation of the euro
Since the day of the official QE announcement by the ECB, the euro has lost about 3.7% against the US dollar, which corresponds to an annual pace of depreciation of about 28%. In the six months before the announcement, the euro had lost 14.2%, or about 26% per year. Hence, the euro’s depreciation rate against the greenback has accelerated slightly since QE became fact.

This pattern of accelerated depreciation is generally valid against most other major currencies, and particularly evident against the British pound. In the six months before the ECB decision, the euro shed 3.2% against Sterling, i.e. 6.3% per year.

Since then, however, its fall has accelerated to 5.1%, or 37% per year. Against Japan’s yen, the euro lost 0.1% (0.2% p.a.) in the six months until 22 January, but dropped by another 2.4% (19% p.a.) since. Similar trading patterns can be observed against most other currencies, with the notable exceptions of the Swiss and Scandinavian currencies, which represent special cases.

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