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Draghi plays down the focus on size of ECB balance sheet - BTMU

FXStreet (Łódź) - Derek Halpenny, European Head of Currency Strategy at the Bank of Tokyo Mitsubishi UFJ, believes that the fact that Mario Draghi refused to provide the target size of the ECB balance sheet yesterday might lead to of increased scepticism over the degree of the central bank's easing.

Key Quotes

"We mentioned here yesterday that the ECB might have taken the most flexible option in providing just a starting amount of monthly purchases for ABS and Covered bonds leaving it open for adjustment further into the future. In the end we got a lot less than that with no mention of amount at all leaving the market no clearer this morning over the size of the QE program that is set to get underway later this month with covered bond purchases."

"Furthermore, Draghi played down the focus on the size of the ECB balance sheet stating that the ECB only had one target – price stability. We laid out the details of the announcement yesterday in our BTMU FX Weekly, so we won’t do it again here."

"The key point though is that the lack of detail on size certainly raises the risk of increased scepticism over the degree of ECB easing, at least until we get a sense of the scale of buying as Q4 unfolds. Draghi did emphasise the potential for a large program stating there was possibly about EUR 1trn worth of assets available for purchase with the TLTRO funds on top of that."

"From the perspective of the euro, the scepticism may offer the euro some support but the flip side of scepticism over the impact of this QE program is that it will lift expectations of a broader sovereign debt QE program being required. Importantly, Draghi kept that hope alive yesterday by stating the Council was unanimous in agreeing to “adopt additional unconventional measures” if required."

"Our current assumption is that the ABS/Covered Bond program would mean no sovereign debt QE would be required. We will stick to that view for now but we are little less sure on that now but will await the start of the program to gauge its size."

"What is clear is that in contrast to QE programs announced by the Federal Reserve since the financial crisis began, the reaction to this QE program appears far less convincing. With the Fed programs either the announcement or the expectations of an announcement helped lift equities and inflation expectations."

"For the euro-zone equity markets continue to under-perform and fell sharply yesterday while the 5yr-5yr forward inflation swap rate remained around its record low at 1.9%. The markets are certainly underwhelmed. Hence, while we see some scope for a euro correction given the extreme negative sentiment and positioning, any rebound is likely to be pretty shallow and brief."

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