ECB chief Draghi wants Japanese-style currency weakness

Policy moves by Europe’s most senior banker Mario Draghi earlier this month are aimed at achieving a Japanese-style currency weakness, according to T Bailey’s Peter Askew.

The multi-manager said the European Central Bank had a “desire to mimic the Japanese” to weaken its currency and resuscitate inflation because “the two are connected”.

“What Mario would love to achieve is to weaken the euro, whose strength has driven down inflation,” he said.

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“Like the Japanese, the ECB has to also deal with recycling its current account surplus.

“As before, he left us with more rhetoric, ‘there’s more to come’.

“What he means is that the ECB’s next step is to buy a relatively cheap asset, European Asset Backed Securities (ABS).”

Mr Askew said he was uncertain that new targeted low-cost loans aimed at providing cheap capital to banks, to then lend to businesses in Europe, would provide much of a boost, especially following the “mixed success” of the UK’s Funding for Lending Scheme.

However, the manager said investors should “make no mistake – Mario wants a weaker euro”.

“So far not much has happened to the currency – hedge funds were already short the European currency so the marginal seller may take a while to surface, but in time Mario would yearn for a bit of last year’s Japanese currency weakness,” he added.