ECB “hot air” leaves 27-month EUR low in the dark
ECB trying to buy itself more time
Majority looking to Q1, 2015 for action
More ‘hot’ air and further inaction from the ECB is disappointing the EUR bear, temporarily at least after today’s monthly monetary meeting. More quantitative speak, not as dovish as expected, from ECB’s Draghi during his obligatory press conference is pushing both bunds and regional yields higher and is pressuring some of the EUR short positions into taking some well earned profit off the table.
With the ECB not providing any new details on progress to launching a more aggressive stimulus program, Draghi will be hoping that the markets will not turn against the Central Bank. In effect, Euro policy makers are trying to buy themselves more time. However, the bigger question is will the market give them the time?
If the markets do happen to lose patience, then investors should be expecting a volatile couple of weeks, as they will be required to watch every piece of data coming out of the Eurozone for concrete signs of ‘deflation.’ If this scenario becomes a reality there will be a mad scramble out of euro equities and into high-quality bonds.
Prior to this morning’s announcement, a percentage of the market remained on tenterhooks, buying into a more aggressive approach by the ECB. November rhetoric from Draghi himself indicated that the ECB needed to move to boost inflation “without delay.” This, along with some other carefully splattered “dovish” comments had a minority pricing in something to be announced as soon as this week. The majority is still looking to Q1, 2015 for action.
Today’s ECB’s main talking points:
Quelle surprise-the ECB did “not” announced any new initiative.
There was no tweaking of the second TLTRO, which will be officially launched next week. The ECB staff members did cut the forecasts for both growth and inflation, but Draghi acknowledged that the forecasts do “not” incorporate the recent drop in energy prices.
The ECB’s recent sense of urgency seems to have got lost in translation during Draghi’s press conference.
This is allowing the EUR bear to be pressured into taking some profit off the table. The EUR has rallied from its 27-month low outright (€1.2292) print before the rate announcement, to the mid €1.2450’s. During the process they have managed to take out a plethora of stop-loss profit orders on the way. The omission of a sovereign bond commitment has been supporting the EUR on dips for the time being.
Draghi seems to have abandoned expectations for any new QE in January, stating that the ECB council will reassess current measures in early 2015.
He offered little doubt that the details of sovereign QE were already being hashed out, with all possible assets but gold and foreign assets under consideration for purchase. Not much of a surprise, he does appear to be frustrated with the lack of structural reforms in the euro area – advocates greater “sharing of sovereignty”, but this is clearly outside of the ECB’s mandate to bring about.
ECB staff cut next years inflation forecast
As well as this year, to +0.5% from +0.6%, which does not seem like too much, although it worth noting that back in March the staff predicted 2014 inflation would be +1.0%! Their 2015 inflation prediction has fallen from +1.3% back in March to +0.7% this morning. The word “Deflation” was not mentioned or uttered.
A decision on QE would not require a unanimous decision.
It’s a fact; Germany is opposed to SMP, OMT, covered bond and any asset-backed security purchases. Nevertheless, Draghi does see QE being a success in the U.S and U.K. Japan is a different story; their QE program is a bit more complicated and being driven by several other factors.
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