What the EUR Bear needs from the ECB?

Will Draghi stand and deliver?

Market ready to punish the ECB

EUR shorts need a surprise

Where is the reserve ammo?

The EUR bear finds out his or her own fate in a matter of hours. Will Draghi and the ECB stand and deliver what’s rumored and expected of them? It’s always conceivable when dealing with Euro policy makers that they could come up short on their commitment to overcome the eurozone growth and low inflation problems. They are not the most proactive of policy committees. No matter what, the Euro bear will either be basking in glory, or the market collectively gets to punish the ECB for further shortcomings, as there will be market volatility. Draghi is required to sell whatever deal the ECB puts forth to the public, making his post-ECB press conference this morning more important than probably “the” official announcement.

Rumor and innuendo

The first bit of information about the possible size of the ECB’s bond purchase program filtered throughout the market yesterday, but the final details could contain surprises. Rumor and innuendo never trump what’s written in black and white.

Released stories suggested that the ECB would be buying €50 billion in sovereign bonds a month for either one year or possibly through the end of 2016, for a minimum total purchase amount of €600 billion. Up until now the majority have been expecting the ECB would announce a QE worth €500-700B. The “single units” initial reaction was to surge towards the €1.17 handle before retreating to current levels (€1.1620) – the typical “buy the rumor, sell the fact” trade reaction. But, the final details and breakdown this morning could well contain surprises.

Bear’s require a surprise

The market needs to be surprised on the size and make up of the program for the Euro bear to garner further profits by pushing the EUR firmly through its 11-year low and open the doors towards €1.10 and even parity.

For this to happen, the ECB needs to announce a combination of surprises:

An open-ended program with purchases tied to the achievements of a certain level of inflation

An explicit target well above the market consensus €700 billion

The entire balance sheet expansion is done by buying sovereign bond only

Expand its balance sheet by €1trillion and rely on sovereign bonds

Or front load the program with sovereign bonds

A blend of the above points will always see some short EUR profit been taken off the table, but once investors have interpreted the finer details, should convince the EUR bear that their short positions remain in good standing.

Draghi’s slight of hand

The ECB’s goal (fuelling inflation and push it back to the +2% mark) needs a significantly weaker EUR, which is unlikely if the Central Bank caps the size of any sovereign debt program at €500-600 billion. The market has already priced these numbers into the equation. It’s the surprise that will maintain the bearish momentum; otherwise the short EUR’s will be punished. The trick for Draghi in the press conference is that he will be required to give the perception and illusion that the ECB has more ammunition in the background.

The market needs to be convinced or the ECB will be punished and the EUR will be trading much higher, periphery yields pushed up from their ultralow yields and euro equities seeing red.