Official comments have injected volatility into the foreign exchange market.  As we anticipated, Japanese officials pushed back against the seemingly free-fall in the yen sparked by the aggressive BOJ action and the diversification of the government pension funds.  Finance Minister Aso expressed concern about the pace of the yen’s decline. However, comments by Abe-adviser Hamada underscored that the direction was no objectionable and that JPY120 would be good for the Japanese economy. The dollar was pushed off a full yen to roughly JPY117.35 before finding a good bid.  

In the European morning, at a banking conference in Frankfurt, the ECB’s Draghi expressed a sense of urgency that heightens the risk of fresh action as early as next month. This pulled the rug from underneath the euro. The stabilization seen this week ended abruptly, and the euro dropped from near $1.26, which it had tested over the past two sessions, to new lows for the week near $1.2420. 

Draghi said inflation has to be lifted as fast as possible and that the ECB would widen its asset purchase plan to achieve this, if necessary.  It seems clear that he thinks it is necessary. Previously, ECB officials had intimated that with covered bond purchases finding traction at more than 2 bln euro a week, the ABS program just about to begin, and the second TLTRO in a few weeks, which promises to be more used than the first offering, there was a sense of waiting to see the impact.  However, Draghi’s comments hold out the possibility that the ECB will announce an increase in the range of assets it at the next meeting, at which the staff macro forecasts are likely to be cut again.  

The Bundesbank’s Weidmann is also speaking at same banking conference.  He is not displaying the same sense of urgency as Draghi.  Instead, he is talking about other long-term reforms, such as reducing the tax incentives that favor debt over equity, and he pushes one of his hobby horses, changing the zero-risk rating of sovereign bonds and/or other measures when banks hold a substantial amount of capital in government bonds. 

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