According to Cardinal Trading, the European Central Bank imperatives include weakening the euro despite the risk of sparking a currency war.
Tokyo, Japan – Tokyo based Cardinal Trading: The European Central Bank’s decision to embark on a large asset purchase scheme aimed at encouraging lending and increasing liquidity within the trading bloc will almost certainly serve to weaken the euro but global policymakers have yet to raise concerns.
Head of currency strategy at Cardinal Trading, Arvind Modhi said, “If this was the People’s Bank of China, there’d be uproar. They’d be accused of deliberately weakening their currency to give them a competitive advantage over other exporting countries.”
There has been little in the way of protest as the ECB prepares to unleash a deluge of money buying up asset-backed securities (ABS) like private sector debt and packaged mortgage bonds in a bid to encourage European commercial banks to lend rather than hoard their vast reserves.
“There hasn’t been any real objection from the likes of the US, Britain, China or Japan because they all believe that a currency war in which all parties must seek competitiveness for their respective export sectors is preferable to a deflationary spiral in a market as crucial and systemically important as the euro zone,” said Modhi.
Japan knows only too well the damage that deflation can wreak on an economy as it has spent much of the last 20 years locked in combat with falling prices. Its own QE program, the baby of Prime Minister Shinzo Abe and BoJ Governor Haruhiko Kuroda, was introduced in April of this year to a muted response from the global community despite the yen falling to record lows against the US dollar and the euro.
Cardinal Trading says it expects the euro to weaken to close to $1.20 to the US dollar within the next 6 months.
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