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ECB underwhelms with the obvious financial market implications - MUFG

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Dec 4, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    FXStreet (Delhi) – Derek Halpenny, European Head of GMR at MUFG, notes that the Governing Council of the ECB agreed to ease its monetary policy stance through numerous steps that were clearly below the consensus in the financial markets and below our more aggressive expectations of possible action.

    Key Quotes

    “Today, the ECB Governing Council agreed to:

    1) Extend the period of QE by 6 months from September 2016 to March 2017.

    2) Leave the total purchase amount per month at roughly EUR 60bn.

    3) Reinvest principal payments on maturing securities.

    4) Extend the asset purchases under the Public Sector Purchase Program to include euro-denominated debt by regional and local governments.

    5) Cut the deposit rate by 10bps to -0.30%, effective 9th December.

    This set of measures is surprisingly cautious to us and we can only conclude that there has been either an unintended miscommunication with the financial markets or that at today’s Governing Council meeting there was an unexpected greater degree of opposition against a more aggressive set of policy measures.

    In the Q&A session, President Draghi answered the question of why the ECB was not more aggressive in their action by reminding us that the QE program since its beginning is already working and therefore only an augmentation on the scale taken today was justified to ensure that the price stability mandate would be met.

    Looking at the core rate, which excludes energy, the ECB has lowered its 2017 projection from 1.6% to 1.5%. The lower inflation projections were probably enough in themselves to justify some extension in the QE program. However, we would argue that since the ECB meeting in October there has been continued communication expressing concerns over too low inflation that clearly raised expectations.

    What helped convince us of aggressive action was the requirement to avoid any “unwarranted tightening of financial market conditions” but that is certainly what we have got in response to today’s decisions.

    The more cautious monetary policy action than we expected today will have consequences for our near-term EUR/USD forecasts. We were forecasting 1.0400 by year-end, having lowered our year-end forecast from 1.0900 on expectations of more aggressive action. 1.0400 now looks unrealistic and of additional concern to us is the lack of any aggressive forward guidance.

    We now have a EUR 1.53trn QE program and the divergence theme as a driver of FX is not going away. Levels around parity are still probable, but ECB caution today means it’s a 2016 story rather than an imminent one.”
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