We’re sure it is not the first time that the 1986 film title has been used to explain the performance of the euro currency.
But perhaps now, by accident, it is the most appropriate. In the film, special effects man Rollie Tyler is hired by a government agency to convincingly stage the assassination of a well-known gangster. In the modern-day re-run, Italy’s Mario Draghi is attempting to knock-off the euro in a convoluted plot with multiple aims.
By lowering the value of the unit against its competitors the European Central Bank might spark foreign demand for the Eurozone’s exports. At the same time a weaker euro would lift the price of imports helping stoke some much-needed inflationary pressure. The euro currency is finally starting to feel the weight of the might of the ECB, falling to $1.3545.
Last week’s central bank meeting at which the ECB drove its deposit rate into negative territory initially caused the euro to shrink to $1.3503 before surging to as high as $1.3677 as investors were relieved that a decision to announce outright QE was delayed.
Spanish 10-year yield fell through the U.S. benchmark this week.
But the euro has started to shrink as emphasis has migrated from the first use negative interest rates in order to encourage lending and onto the potential for the launch of limited bond buying across certain bonds. Jawboning, or trying to steer the market by verbal intervention, has worked well for Draghi since his London “whatever it takes” speech in June 2012. That promise cost him nothing yet paid off well.
Now, however, with the reality of low inflation, investors are starting to sense that asset purchases will be part of the mix used to defeat deflationary threat. The prospect of success is showing up in growing confidence surrounding peripheral government debt. For the first time since 2010 the yield on Spanish debt fell through the U.S. 10-year yield. Perhaps that’s the real illusion here as investors question the relative likelihood of potential default in the event of future crisis.