EUR/USD: Trading The ECB - Views From Major Banks
Credit Suisse: Mixed Signal, EUR/USD Rallies Post-Meeting A Long-Term Sell.
Our European economists expect the ECB to deliver new easing measures, but also see a risk that the central bank will simultaneously point to the possibility of tapering asset purchases in 2017. This type of mixed signal is not easy to decipher, and much would depend on how ECB chief Draghi explains decision making. In particular, a poorly-explained move towards tapering would pose a risk of a European "taper tantrum" and a potent EUR surge on the day. Still, if the ECB is seen tapering enough to prompt EURUSD to push above its October lows around 1.0860, the pair will be back in the ranges it traded before the US election, which would likely require a material tightening in at least longer-term US-euro area rate differentials to be justified. Given that our economists doubt that core euro area inflation is likely to push much beyond 1.0% in 2017, this would seem like jumping the gun to us. As such we would see a move into a 1.09-1.12 range as representing a longer-term sell level for EURUSD. On the other hand, if the ECB is sufficiently dovish, EURUSD should resume its underlying downtrend.
Credit Agricole: Limited Room For ECB To Extend Dovish Expectations; EUR/USD A Buy.
The EUR has been broadly range-bound after rebounding from this year’s lows. The main focus should turn to this week’s ECB monetary policy announcement as a currency driver, especially as political uncertainty is unlikely to increase further in the short-term. As reported by “La Republica” yesterday morning Renzi may press for early elections in January/February next year in return for staying in power until then. However, according to President Mattarella early elections are technically not feasible because changes would be needed to the country’s election law. We remain of the view that EUR/USD is a buy. Limited room of the ECB exceeding dovish expectations coupled with speculative short positioning close to multi-week extremes should keep the risk of further position squaring upside intact. This is especially true should the Fed fail to consider a more than anticipated hawkish forward guidance.
Morgan Stanley: Justification For A Mild EUR Weakness Over The Meeting.
We believe the reaction of the EUR over the ECB meeting will ultimately depend on the probability of tapering in the next 12m. In particular, EURUSD will depend on the short end rate differential between EMU and the US. Our more medium term view, beyond this ECB meeting, is that we expect EURUSD to fall based on the rate differential staying wide and broad USD strength. Our economist's assumption is that the ECB will keep rates on hold at this week's meeting but add a 6m extension to its QE purchase programme. Since the ECB will come back with results from its committees on which QE constraints to relax, investors may have to deal with a plethora of information over the press conference, including new macro economic forecasts. Here are some points we will be looking for as FX watchers and the potential impact it would have on the EUR when taking each measure in isolation. We see justification for the EUR to weaken mildly over the ECB meeting.
ANZ: Any EUR/USD Rallies Post-ECB Meeting Are Corrective And A Selling Opportunity
While there is a widespread expectation that the ECB will extend QE past March 2017, there is a debate about what composition this might take. The central case is that the current level of purchases (EUR80bn) will be extended by six months. We know there is resistance at some national central banks to everexpanding QE, so there is talk that purchases could be scaled back (ie GBP60bn per month), but may be extended for longer, or that QE could be reviewed on a quarterly basis depending on how the path of inflation unfolds. The ECB could also alter the mix of assets it buys (greater weight towards corporate bonds), possibly change the rules preventing QE purchases of bonds yielding less than the deposit rate, and tweak guidelines regarding the amount of an issuance that can be bought. For this reason, the FX market is anticipating a potentially volatile market around the ECB meeting. While the current growth environment suggests there may be little need for more stimulus, there is a reasonable argument to be made that current momentum is dependent on maintaining existing monetary stimulus....EUR/USD failed to break below 1.05 following the defeat of the Italian referendum. We view rallies as corrective and selling opportunities.
NAB: Binary outcome for EUR/USD From The ECB.
The ECB meeting Thursday continues to hold out the threat of a taper for when the current QE program ends in March...Our central call remains the ECB will leave this decision until March (possibly January) when the markets backdrop may be less vulnerable, but there is a not insignificant risk the governing council pushed through a taper in all but name, perhaps limiting bond buying to a maximum of EUR80bn per month. That being said and with the USD pulling back, the outcome still looks binary; with EUR/USD rising to 1.10-1.1150 on an ECB taper or back down and testing the post-election low around 1.05 if the ECB extends QE in its current from past March 2017.
Barclays: EUR/USD Risks Are Asymmetric To The Topside; Sell Rallies
We expect the ECB (Thursday) to announce a time extension of its asset purchase programme by six months at the current rate of EUR80bn/month, along with necessary changes to the public sector purchase programme technical parameters to ensure a sufficiently large pool of eligible assets for purchase. This likely sits towards the dovish end of market expectations. Indeed, a Reuters poll found that while most economists expect a six-month time extension at the current pace, 14 of the 54 survey respondents expected tapering this week. Likely technical parameter changes include a removal of the yield floor (currently linked to the deposit rate), a relaxation of the issue share limit for non-CAC bonds and using the substitution option for Germany. A relaxation of the issue and share limit for AAA-rated countries is less likely. We do not expect purchases of bonds beyond 30-year duration, and purchases are unlikely to shift from the capital key rule. While EURUSD is likely to depreciate if our expectations of ECB action are met, large netshort EURUSD positioning and technical support means a less-dovish decision could result in a materially higher EURUSD. Indeed, our leveraged and real money clients still hold a large cumulative net short EURUSD position and technical support levels, in the form of multi-year lows at 1.0458, are not far away. As such, short EURUSD positions prior to the event are not compelling but we would look for opportunities to initiate these following any material appreciation.
TD: EUR In A Very 'Precarious' Position; Upside Risk S/T But Primary Trend Is Lower.
We continue to target the 1.04 level in EURUSD for end-Q4, but a hawkish outcome flags obvious upside risks to this view. A hawkish outcome – even if unintended – has the potential to reverse the downtrend seen in the pair since late September. Amplifying our concerns is the current state of investor positioning. In the latest available data, the leveraged account component of the IMM data maintained a net short of 26.4% of total Open Interest. While this is not the most stretched level ever seen, it is close to points where this investor segment has covered outstanding shorts in the past. As noted previously, however, we are a little more focused on upside risks for this pair – at least for the near term. We continue to believe that the primary trend is lower, and this is only likely to change on a particularly hawkish ECB outcome, but the risks of an impending squeeze on existing shorts looms large in our estimation. We think the 1.0851 level should represent significant resistance to a move higher while 1.0817 is the 38.2% retrace level of the post-US election trading range. At the same time, we note that 1.0909 (50%) and 1.1001 (61.8%) are also key Fibonacci levels of this same range.
BofA Merrill: Room For Disappointment Or/And Profit Taking.
we see risks of weak forward guidance that could disappoint FX markets. Recent headlines point to strong disagreements within the ECB on what to do next. This suggests to us that extending QE again without papering next year could be much more difficult, particularly if this requires relaxation of the capital key. Our economists expect QE extension without tapering this week, but Draghi may not be able to give a strong message on the ECB commitment to QE for next year, making the current QE extension less effective with markets. Markets could test the ECB, as they did with the BoJ early this year. The initial EUR weakness if the ECB extends QE without tapering this time may prove an opportunity to buy, particularly if it triggers profit taking. Our latest positioning analysis suggests that the market is short EUR/USD, although not by as much as a year ago. This position could explain why EUR has not followed the JPY lower during the USD rally last week making it more difficult for the ECB to being the currency further down. Weak ECB forward guidance could squeeze the short EUR position higher.
BTMU: EUR Resilience Unlikely To Persist Regardless Of ECB Outcome.
The need for the ECB to announce an extension in QE beyond March 2017 seems obvious to us. Even though the cyclical picture for the euro-zone economy looks to be improving, more serious problems related to the cohesion of the single market could be brewing. Given the escalated political uncertainty, now doesn’t appear to be the time to signal an end of ECB support that is clearly helping to stabilise financial markets in the euro-zone. We do not expect the resilience of the euro to persist whatever the outcome of the ECB meeting tomorrow.
BNPP: EUR/USD To Struggle To Extend Upside Much Beyond 1.08.
Our economists also note that in light of the ‘no’ vote, the likelihood of the ECB announcing a scaling back of asset purchases is now less likely at their meeting this Thursday, and that a change in forward guidance in order to give some sort of signal to the markets that QE cannot continue indefinitely in the current form is instead more probable. We would expect EUR/USD to struggle to extend upside much beyond 1.08.
SocGen: ECB To Announce QE Extension; Major EUR Downside Unlikely This Month.The big event of the week is Thursday’s ECB meeting when an extension to ECB bond-buying is likely to be announced (but possibly without any direct reference to how much they buy each month, hinting at tapering). All in all, major EUR downside isn’t likely this month, but we do still expect a move to parity between now and the French Presidential elections as voter anti-establishment sentiment erodes confidence.
Goldman Sachs: ECB Meeting Holds 2 Questions For Markets.
For markets, this week's ECB holds two questions. First, will there be a formal taper decision. Second, if there is no formal announcement to this effect (our base case is for a continuation of the bond buying program at an unchanged pace through late 2017), is the backdrop to the Governing Council sufficiently caustic that President Draghi in the press conference essentially signals that a taper will soon be coming. We think markets will treat either outcome with little distinction. EUR/$ would go up, perhaps substantially. As a result, we think markets will put more weight on the tapering signal, rather than any kind of program extension (which is subject to modification anyway). We think this is no time to taper, simply because of the challenging inflation dynamics in the Euro zone, in line with our European economics team's assessment A premature taper, which a decision to this effect at this meeting would certainly be, will only complicate the ECB's task of getting the Euro zone out of lowflation and fundamentally banishing deflation risk.
UOB: ECB To Deliver The Consensus, A Mildly Bullish Effect On EUR/USD.
All eyes are on the ECB meeting today – policy decision at 8.45pm SGT, followed by Draghi’s press conference at 9.30pm SGT. Expectations are already running high for this meeting, with the one-day implied volatility rising to 25.4%, the highest for a ECB meeting since March where Draghi cut rates more broadly than the markets had expected and increased the pace of bond purchases. Tonight, we expect the ECB to deliver the consensus - announcing a six-month extension of its asset-purchases program (APP) past its original due date in Mar 2017 at the current €80 billion run rate, while keeping its key interest rates unchanged. The extension, in our view, is likely to be complemented by a move to improve the supply of eligible bonds, for example, the removal or softening of the yield floor. We do not expect ECB to rush to taper, earliest being some time in 2H17, provided the Eurozone economic recovery continues and inflation (gradually) rises toward the ECB's target of near to 2%. In all, we see a mildly bullish effect on EUR/USD. That said, a move above Mon’s high of 1.0796 would not be surprising although thick option-related offers near 1.0800 (€3.7b of 1.08 strikes expiring today and tomorrow) may pose an initial hurdle.
SEB: ECB To Lean Towards The Dovish Side.
SEB expects: Rates unchanged QE extension by 6m, current pace of QE (EUR 80bn/m) maintained. Remove deposit rate floor to ensure QE implementation. ECB to lean towards the dovish side to avoid provoking a further surge in yields. Q&A session. ECB to confirm downside risks to growth, inflation and of its easing bias Repeat that ECB policy is effective and that the focus is on policy implementation. Deny “ECB taper” rumours, reiterate the ECB has the will, capacity and ability to act. Repeat call for swift implementation of growth-supportive fiscal policies and structural reforms. Potential market reaction: Largely neutral, our expectations are broadly in line with consensus.
RBC: QE Extension And No Tapering In Sight.
The ECB faces a familiar trade-off when it meets later this week. Despite recent rises in the headline rate, the inflation backdrop is still weak and we do not anticipate that the new set of staff forecasts will show a return to the ECB’s inflation target before 2019. Though the euro area’s economic recovery will continue over the forecast horizon, growth remains too weak to push underlying inflation firmly upwards and risks to the outlook, particularly political risks, have intensified since the last meeting in September. Given that backdrop, we expect that the Governing Council will come out in favour of more easing in the form of continuing its QE programme. But a lack of available bonds means that the question of how they will achieve that remains. To extend the QE programme until at least September 2017, we expect that the ECB will water down the deposit rate floor – essentially allowing purchases below the -40bp threshold thereby unfreezing the currently unavailable assets. That should get the ECB towards a September 2017 threshold (depending on assumptions) but not much beyond.
UBS: ECB to extend QE in its current form (€80bn monthly) by six months to Sept'17
According to our base-case scenario, the ECB will announce a six-month extension of QE, from March to September 2017, with ongoing purchases of €80bn per month; such a decision would seem broadly in line with market expectations. While the new staff macroeconomic forecasts for 2017-19 will form an important basis for the decision, we think the members of the ECB Governing Council will have to take an even more comprehensive view, evaluate the broader balance of risks, and ask themselves whether the time is ripe for a reduction in monetary stimulus. In this context, the GC will also have to consider the implications of political events, such as the outcome of the Italian constitutional referendum on 4 December and the sharp rise in global bond yields which has probably led to an (unwelcome) tightening of financial conditions in Europe. We currently expect the ECB to taper after September 2017, perhaps over the course of one year. We do not think ECB policy rates will be cut further, but rate hikes are unlikely before 2019.
UniCredit: ECB To Preserving Monetary Accommodation Via Extending QE Beyond March 2017.
On Thursday, we expect the ECB to announce a six-to-nine-month extension of QE beyond March 2017, at the present pace of EUR 80bn per month. We also think that the central bank will raise the ISIN limit to 50% from 33% and switch to a more flexible definition of deposit-rate floor, applying it to a portfolio of bonds rather than to each individual security....The decision to keep buying assets at the pace of EUR 80bn per month would be mainly intended to preserve the current “very substantial degree” of monetary accommodation, at a time of limited progress towards a “sustained adjustment in the path of inflation consistent with the Governing Council’s inflation aim”. Any other policy option, be it tapering or a one-step reduction in the monthly purchases, would lead to tighter financial conditions, because investors would (correctly) interpret such moves as deviations from the ECB’s reaction function, possibly due to political reasons. As a matter of fact, in the QE framework, it is the pace of monthly purchases that sends the most powerful market signal. Therefore, any reduction in the flow of purchases (say to EUR 60bn) would ultimately represent a net tightening, even if the Governing Council were to try to offset this with a long extension of the program (for example until March 2018).
Danske: Too Early To Expect An Announcement On Ending QE.
We expect the ECB to extend its QE purchases by six months to September 2017 and maintain the EUR80bn monthly purchases. The continuation of the QE programme should follow as inflation – despite the outlook for an increase – is still not on a sustained path towards the 2% target, which the ECB has defined as the condition for ending the purchases. Lately there has been a lot of speculation on QE tapering, but in our view it is too early to expect an announcement about ending QE. Very prominent ECB members including President Draghi have increasingly emphasised the lack of upward pressure on underlying prices, which together with an expected considerable downward revision to the ECB’s core inflation forecast, should convince enough of the ECB members that it is too early to consider an end-of-easing. We expect the ECB to publish an inflation projection which is close to the one from September but not very optimistic on 2019. Especially the core inflation outlook should be lowered, reflecting a lack of upward pressure on wages due to slack in the labour market. For headline inflation, the ECB is likely to project 1.2% in 2017, 1.5% in 2018 and 1.7% in 2019.
ABN AMRO: No Time For Taper; ECB To Extend QE To September 2017.
We expect the ECB to announce an extension of QE at the current pace to September 2017 from March 2017. There has been some speculation that the ECB may either extend at a slower pace (possibly for longer) or possibly extend at the current pace for 6-months, but send some kind of signal that tapering is likely thereafter. One of these options might be attractive from the point of view of generating a wide consensus in the Governing Council. However, it would not make too much sense as markets would focus on the slower pace/future tapering signal rather than the extension. This means the tightening of financial conditions that the ECB would seek to avoid may actually be triggered by such an announcement. For this reason, we expect an extension at the current pace, with the ECB refraining from the t-word. The recent rise in bond yields has helped to increase the eligible universe for ECB purchases. However, the ECB would still need to change the rules of its programme to further increase this universe if it is to make space for an extension of QE. We think the ECB will likely drop the restrictions on not being able to purchase assets below the depo rate and below a 2y maturity. This seems the most straightforward option to us. The Governing Council could also allow more flexibility for substitute purchases, though we expect continued limited deviations from the capital key.
Nordea: ECB To Prolong QE Without Tapering For 6 Months.
We expect the ECB Governing Council to continue to ease monetary policy at its meeting on 8 December and by doing so to distinguish its policy further from the rising US yields. The main emphasis will be on the asset purchase programme (APP) which we expect to be extended by six months until end-September 2017 with the current monthly pace of EUR 80bn. The prolongation of the programme is likely to be coupled with a message of being ready for even further extensions, if necessary. We wouldn’t completely rule out the possibility that the ECB reduces the target amount (and possibly extends by more than six months). However, that move would almost inevitably be interpreted as a tapering signal which we think the Governing Council wants to avoid. The fear of giving such signals is especially strong at this point where the ECB wants to distinguish its monetary policy from the rising rates in the US due to different inflation outlook in the two economic areas. In order to be able to run the programme efficiently, the ECB has to change its technical parameters.... Regarding forward guidance, the ECB will likely stick to the wording that rates are expected “to remain at present or lower levels for an extended period of time, and well past the horizon of our net asset purchases.” However, we do not expect any changes in the central bank interest rates. Further moves deeper to the negative territory would require a real threat of deflation to materialise which is currently not the case.
Goldman: No Change, Little Action From The Meeting.
The ECB's Governing Council will meet on Thursday, January 19. In line with the broad market consensus, we expect little action at the meeting, based on the lack of market news since December. Specifically, we expect key policy rates to be left unchanged, and no changes to the Asset Purchase Programme (APP). We expect the introductory statement to continue to describe risks to the growth outlook as skewed to the downside, and that Mr. Draghi will resist any suggestion that recent inflation data warrant the withdrawal of monetary accommodation.
Morgan Stanley: Staying Short EUR/USD* Into ECB.
We used the recent rally in EURUSD to add a short position to our portfolio. Our arguments for a weaker EUR have not changed. In the absence of further political integration, the ECB may have to remain accommodative to support the struggling periphery even as the core overheats. As EMU inflation shows signs of rising, real yields may decline to weaken the EUR. The risk of rising populism with the upcoming elections in the Netherlands, France and Germany will also be an undertone for the currency. We'll pay particular attention to the ECB's rhetoric on the recent upside surprise in inflation.
Nomura: No Change, ECB To Remain Guarded.
In line with an overwhelming consensus, we do not expect any changes to the ECB’s monetary policy programme at tomorrow’s meeting. Instead, we expect the focus to be on the Governing Council’s assessment of macro-economic developments in light of some positive dataflow over the past few weeks. Thanks in part to that dataflow, we now believe the risks to the ECB’s (and consensus) forecasts for the growth and inflation outlook have shifted to the upside. During the post-meeting press conference, President Draghi will nevertheless probably re-emphasise the ECB’s strong commitment to the existing monetary policy programme by stressing some of the numerous downside risks that could generate further instability for the region in the months ahead. In terms of trades: we enter 10yr OLO vs short 10yr RFGB at 20bp targeting 10bp (stop 25bp), but also a tactical long 15yr BTP Mar-32 vs 10yr and 20yr at 10.5bp with a target at 0bp stop at 15b.
Credit Agricole: No ECB Surprises; Further Upside Into 1.09 A Selling Opportunity.
This week’s main focus will be on this year’s first ECB monetary policy announcement. In line with consensus expectations we see limited scope for ECB surprises. If anything, central bank President Draghi should defend a more dovish stance in light of still muted core price developments. As such he is likely to downplay the higher than expected headline inflation, as confirmed by December CPI data. Such a stance is fully in line with what he stressed previously. As long as higher inflation is largely driven by base effects, upside risks to inflation are likely regarded as muted. In an environment of stable investors’ central bank rate expectations it will be about external factors such as risk sentiment to drive the currency. With risk sentiment more unstable, some further EUR/USD upside risk cannot be excluded in the short-term. However, from a broader angle we believe rallies into 1.09 should prove corrective and should still be sold.
SocGen: An Uneventful Meeting; Long USD & Walk Away.
We get a likely uneventful ECB meeting on Thursday, but it is still likely to be a combination of renewed widening in yield differentials and a ramping-up of nervousness ahead of the French elections which will be the catalyst for renewed Euro weakness when that happens.The choppiness of the most heavily traded pairs, like EUR/USD, USD/JPY and GBP/USD, not to mention the recent moves in equities and bonds, is making life difficult for anyone who doesn't just put positions in place and walk away. Those who do just walk away are probably the ones still long dollars, short Treasuries and waiting for President Trump to begin his first hundred days in office.
RBC: ECB A Low-Key Affair.
The ECB Governing Council’s first meeting of 2017 should be a low-key affair. The December decision to extend QE by nine months, dropping the monthly pace to EUR60bn should largely set the ECB’s policy course for this year. Although headline euro area inflation has recently increased and is forecast to continue doing so in coming months, we fully expect the ECB to choose to ‘look through’ the rise, which is being determined primarily by energy price developments. So we expect little change, with President Draghi again likely to emphasise downside risks to the outlook and the lack of upward trend in underlying inflation, which will allow him to ignore the early calls from some quarters for the ECB to begin the process of normalising policy.
BNPP: ECB To Stick To The Plan; Staying Short EUR/USD Via Options.
On Thursday, the ECB press conference may note further improvement in activity and reduced downside risks. However, our economists expect the ECB to remain very wary of fueling premature speculation about an end to QE. With the ECB emphasizing a preference for sticking with the plan and ongoing asset purchases capping nominal rates, stronger activity data in Europe is likely to keep real rates low, leaving the EUR vulnerable. We remain positioned for EURUSD downside via a EURUSD ratio put spread with KI (buy 1x 1.05, sell 2x 1.03 with 1.0150 KI) (14-Feb expiry)
SEB: ECB To Strike A Dovish Balance On Thurs; Market Neutral.
Having already mapped its monetary policy course for full 2017 at its last meeting in 2016 (8 Dec), the ECB is most unlikely to deliver any further policy adjustments at the upcoming, first Governing Council meeting in the new year on 19 January. Markets will therefore focus on the ECB press conference, in which Mario Draghi will deliver an update on economic and monetary developments in the euro area over the past six weeks. In order to avoid any diminution in the current amount of monetary accommodation, we expect the ECB to strike a dovish balance and dispel any taper speculation. Given the minimal bond and FX market moves since the previous ECB meetings, we expect the outcome of this week’s ECB meeting to be broadly market-neutral.'
BofA Merrill: Draghi To Be Dull; Sell EUR/USD On Any Bullish Reaction.
We think any hawkish statements that strengthen the EUR during the Q&A could be an opportunity to sell EUR/USD again ahead of potential fiscal stimulus in the US. EUR/USD has been a USD trade and weakened as the USD rallied after the US elections. The EUR has not weakened with respect to non-USD G10 currencies and has actually strengthened against the JPY. The EUR remains at its early 2004 level with respect to non-USD G10 currencies. Similarly, although the EUR/USD is down by 2.5% since the December ECB meeting, the EUR is down only by 0.4% with respect to non-USD G10 currencies. In real effective terms, the EUR is stronger than in early 2015. And EUR/USD has corrected higher so far this year, particularly in the last two weeks.
Barclays: No Change From ECB.
We expect no change in monetary policy stance at this week’s ECB meeting. The challenge for the ECB will be to manage market expectations as headline inflation increases in the coming 3-4 months, driven in part by energy prices and the currency. We expect the weakness in underlying inflation to persist in 2018, with core inflation improving but still below 1.5%. Therefore, we think that QE will be needed in 2018 but at a reduced pace of c.EUR35-40bn in H1 and EUR15-20bn in H2.
Danske: ECB To Stay Dovish Despite Better Data.
We do not expect a hawkish stance from the ECB, although the latest economic survey indicators have strengthened further and inflation has risen above 1.0% for the first time in three years. President Mario Draghi will most likely argue that the ECB does not react to a single inflation figure, that the latest inflation gains are due primarily to energy prices and consistent with the ECB’s inflation forecast – broadly in line with last week’s comments from the hawkish executive board member Yves Mersch. The higher inflation is good news for the ECB but it seems clear that the underlying price pressure is most important and here there are ‘no signs yet of a convincing upward trend’.
Deutsche Bank: A Patient ECB For Now.
Our central case scenario is a patient ECB. They should be reassured by broadly unchanged financial conditions after their decision to slow the pace of QE.The ECB won’t feel challenged by the recent data..If current data trends continue, the outright taper decision could accelerate to June rather than September, but the latter is our baseline. The key is whether inflation, especially core, is becoming more likely to exceed ECB forecasts. Euro area headline inflation should rise sharply in January and February, to 1.6% and 1.8% yoy respectively. That said, mid-year is the earliest that the less convincing core inflation will satisfy the minimum conditions for policy tightening...However, the ECB won’t be afraid to change plans, if necessary. If a "sustainable adjustment" in inflation is reached, we don't think the ECB would hesitate to act, even changing the current plan.
UniCredit: Constructive, But Still Dovish.
We do not expect new policy announcements when the ECB meets on Thursday. Therefore, the monetary policy framework will remain the same as announced on 8 December: EUR 80bn of monthly asset purchases until March, with a slowdown to EUR 60bn per month in the remaining nine months of the year. The current forward guidance, which indicates a bias of the Governing Council (GC) for more, rather than less, asset purchases, is likely to remain in place. ..We think that ECB President Draghi will sound constructive, but dovish.
ANZ: ECB To Show Steady Hand.
The tone of this week’s ECB meeting may be more even-handed given the improvement in euro area inflation and encouraging readings on activity. Market chatter of an early end to QE seems premature, however, given that core inflation is still way below target and there is no evidence yet of a sustainable recovery in inflation. However, as growth and inflation improve, it is natural to expect the ECB may not have to announce additional policy measures.
UOB: ECB A Non-Event, EUR/USD In 1.0500-1.0715 Near-Term.
The first ECB meeting for the year tonight is likely to be a non-event. Following the decision to extend its QE program up to Dec this year at its last meeting, we do not expect much from the ECB this round. The statement at the press conference could also remain roughly unchanged, although the tone of the press conference could reflect a stronger confidence inside the board regarding the economic outlook. In all, we expect 1.0500 to 1.0715 in the near term.
- Free trading apps
- Over 8,000 signals for copying
- Economic news for exploring financial markets
You agree to website policy and terms of use
Credit Suisse: Mixed Signal, EUR/USD Rallies Post-Meeting A Long-Term Sell.
Our European economists expect the ECB to deliver new easing measures, but also see a risk that the central bank will simultaneously point to the possibility of tapering asset purchases in 2017. This type of mixed signal is not easy to decipher, and much would depend on how ECB chief Draghi explains decision making. In particular, a poorly-explained move towards tapering would pose a risk of a European "taper tantrum" and a potent EUR surge on the day. Still, if the ECB is seen tapering enough to prompt EURUSD to push above its October lows around 1.0860, the pair will be back in the ranges it traded before the US election, which would likely require a material tightening in at least longer-term US-euro area rate differentials to be justified. Given that our economists doubt that core euro area inflation is likely to push much beyond 1.0% in 2017, this would seem like jumping the gun to us. As such we would see a move into a 1.09-1.12 range as representing a longer-term sell level for EURUSD. On the other hand, if the ECB is sufficiently dovish, EURUSD should resume its underlying downtrend.
Credit Agricole: Limited Room For ECB To Extend Dovish Expectations; EUR/USD A Buy.
The EUR has been broadly range-bound after rebounding from this year’s lows. The main focus should turn to this week’s ECB monetary policy announcement as a currency driver, especially as political uncertainty is unlikely to increase further in the short-term. As reported by “La Republica” yesterday morning Renzi may press for early elections in January/February next year in return for staying in power until then. However, according to President Mattarella early elections are technically not feasible because changes would be needed to the country’s election law. We remain of the view that EUR/USD is a buy. Limited room of the ECB exceeding dovish expectations coupled with speculative short positioning close to multi-week extremes should keep the risk of further position squaring upside intact. This is especially true should the Fed fail to consider a more than anticipated hawkish forward guidance.
Morgan Stanley: Justification For A Mild EUR Weakness Over The Meeting.
We believe the reaction of the EUR over the ECB meeting will ultimately depend on the probability of tapering in the next 12m. In particular, EURUSD will depend on the short end rate differential between EMU and the US. Our more medium term view, beyond this ECB meeting, is that we expect EURUSD to fall based on the rate differential staying wide and broad USD strength. Our economist's assumption is that the ECB will keep rates on hold at this week's meeting but add a 6m extension to its QE purchase programme. Since the ECB will come back with results from its committees on which QE constraints to relax, investors may have to deal with a plethora of information over the press conference, including new macro economic forecasts. Here are some points we will be looking for as FX watchers and the potential impact it would have on the EUR when taking each measure in isolation. We see justification for the EUR to weaken mildly over the ECB meeting.
ANZ: Any EUR/USD Rallies Post-ECB Meeting Are Corrective And A Selling Opportunity
While there is a widespread expectation that the ECB will extend QE past March 2017, there is a debate about what composition this might take. The central case is that the current level of purchases (EUR80bn) will be extended by six months. We know there is resistance at some national central banks to everexpanding QE, so there is talk that purchases could be scaled back (ie GBP60bn per month), but may be extended for longer, or that QE could be reviewed on a quarterly basis depending on how the path of inflation unfolds. The ECB could also alter the mix of assets it buys (greater weight towards corporate bonds), possibly change the rules preventing QE purchases of bonds yielding less than the deposit rate, and tweak guidelines regarding the amount of an issuance that can be bought. For this reason, the FX market is anticipating a potentially volatile market around the ECB meeting. While the current growth environment suggests there may be little need for more stimulus, there is a reasonable argument to be made that current momentum is dependent on maintaining existing monetary stimulus....EUR/USD failed to break below 1.05 following the defeat of the Italian referendum. We view rallies as corrective and selling opportunities.
NAB: Binary outcome for EUR/USD From The ECB.
The ECB meeting Thursday continues to hold out the threat of a taper for when the current QE program ends in March...Our central call remains the ECB will leave this decision until March (possibly January) when the markets backdrop may be less vulnerable, but there is a not insignificant risk the governing council pushed through a taper in all but name, perhaps limiting bond buying to a maximum of EUR80bn per month. That being said and with the USD pulling back, the outcome still looks binary; with EUR/USD rising to 1.10-1.1150 on an ECB taper or back down and testing the post-election low around 1.05 if the ECB extends QE in its current from past March 2017.
Barclays: EUR/USD Risks Are Asymmetric To The Topside; Sell Rallies
We expect the ECB (Thursday) to announce a time extension of its asset purchase programme by six months at the current rate of EUR80bn/month, along with necessary changes to the public sector purchase programme technical parameters to ensure a sufficiently large pool of eligible assets for purchase. This likely sits towards the dovish end of market expectations. Indeed, a Reuters poll found that while most economists expect a six-month time extension at the current pace, 14 of the 54 survey respondents expected tapering this week. Likely technical parameter changes include a removal of the yield floor (currently linked to the deposit rate), a relaxation of the issue share limit for non-CAC bonds and using the substitution option for Germany. A relaxation of the issue and share limit for AAA-rated countries is less likely. We do not expect purchases of bonds beyond 30-year duration, and purchases are unlikely to shift from the capital key rule. While EURUSD is likely to depreciate if our expectations of ECB action are met, large netshort EURUSD positioning and technical support means a less-dovish decision could result in a materially higher EURUSD. Indeed, our leveraged and real money clients still hold a large cumulative net short EURUSD position and technical support levels, in the form of multi-year lows at 1.0458, are not far away. As such, short EURUSD positions prior to the event are not compelling but we would look for opportunities to initiate these following any material appreciation.
TD: EUR In A Very 'Precarious' Position; Upside Risk S/T But Primary Trend Is Lower.
We continue to target the 1.04 level in EURUSD for end-Q4, but a hawkish outcome flags obvious upside risks to this view. A hawkish outcome – even if unintended – has the potential to reverse the downtrend seen in the pair since late September. Amplifying our concerns is the current state of investor positioning. In the latest available data, the leveraged account component of the IMM data maintained a net short of 26.4% of total Open Interest. While this is not the most stretched level ever seen, it is close to points where this investor segment has covered outstanding shorts in the past. As noted previously, however, we are a little more focused on upside risks for this pair – at least for the near term. We continue to believe that the primary trend is lower, and this is only likely to change on a particularly hawkish ECB outcome, but the risks of an impending squeeze on existing shorts looms large in our estimation. We think the 1.0851 level should represent significant resistance to a move higher while 1.0817 is the 38.2% retrace level of the post-US election trading range. At the same time, we note that 1.0909 (50%) and 1.1001 (61.8%) are also key Fibonacci levels of this same range.
BofA Merrill: Room For Disappointment Or/And Profit Taking.
we see risks of weak forward guidance that could disappoint FX markets. Recent headlines point to strong disagreements within the ECB on what to do next. This suggests to us that extending QE again without papering next year could be much more difficult, particularly if this requires relaxation of the capital key. Our economists expect QE extension without tapering this week, but Draghi may not be able to give a strong message on the ECB commitment to QE for next year, making the current QE extension less effective with markets. Markets could test the ECB, as they did with the BoJ early this year. The initial EUR weakness if the ECB extends QE without tapering this time may prove an opportunity to buy, particularly if it triggers profit taking. Our latest positioning analysis suggests that the market is short EUR/USD, although not by as much as a year ago. This position could explain why EUR has not followed the JPY lower during the USD rally last week making it more difficult for the ECB to being the currency further down. Weak ECB forward guidance could squeeze the short EUR position higher.
BTMU: EUR Resilience Unlikely To Persist Regardless Of ECB Outcome.
The need for the ECB to announce an extension in QE beyond March 2017 seems obvious to us. Even though the cyclical picture for the euro-zone economy looks to be improving, more serious problems related to the cohesion of the single market could be brewing. Given the escalated political uncertainty, now doesn’t appear to be the time to signal an end of ECB support that is clearly helping to stabilise financial markets in the euro-zone. We do not expect the resilience of the euro to persist whatever the outcome of the ECB meeting tomorrow.
BNPP: EUR/USD To Struggle To Extend Upside Much Beyond 1.08.
Our economists also note that in light of the ‘no’ vote, the likelihood of the ECB announcing a scaling back of asset purchases is now less likely at their meeting this Thursday, and that a change in forward guidance in order to give some sort of signal to the markets that QE cannot continue indefinitely in the current form is instead more probable. We would expect EUR/USD to struggle to extend upside much beyond 1.08.
SocGen: ECB To Announce QE Extension; Major EUR Downside Unlikely This Month.The big event of the week is Thursday’s ECB meeting when an extension to ECB bond-buying is likely to be announced (but possibly without any direct reference to how much they buy each month, hinting at tapering). All in all, major EUR downside isn’t likely this month, but we do still expect a move to parity between now and the French Presidential elections as voter anti-establishment sentiment erodes confidence.
Goldman Sachs: ECB Meeting Holds 2 Questions For Markets.
For markets, this week's ECB holds two questions. First, will there be a formal taper decision. Second, if there is no formal announcement to this effect (our base case is for a continuation of the bond buying program at an unchanged pace through late 2017), is the backdrop to the Governing Council sufficiently caustic that President Draghi in the press conference essentially signals that a taper will soon be coming. We think markets will treat either outcome with little distinction. EUR/$ would go up, perhaps substantially. As a result, we think markets will put more weight on the tapering signal, rather than any kind of program extension (which is subject to modification anyway). We think this is no time to taper, simply because of the challenging inflation dynamics in the Euro zone, in line with our European economics team's assessment A premature taper, which a decision to this effect at this meeting would certainly be, will only complicate the ECB's task of getting the Euro zone out of lowflation and fundamentally banishing deflation risk.
UOB: ECB To Deliver The Consensus, A Mildly Bullish Effect On EUR/USD.
All eyes are on the ECB meeting today – policy decision at 8.45pm SGT, followed by Draghi’s press conference at 9.30pm SGT. Expectations are already running high for this meeting, with the one-day implied volatility rising to 25.4%, the highest for a ECB meeting since March where Draghi cut rates more broadly than the markets had expected and increased the pace of bond purchases. Tonight, we expect the ECB to deliver the consensus - announcing a six-month extension of its asset-purchases program (APP) past its original due date in Mar 2017 at the current €80 billion run rate, while keeping its key interest rates unchanged. The extension, in our view, is likely to be complemented by a move to improve the supply of eligible bonds, for example, the removal or softening of the yield floor. We do not expect ECB to rush to taper, earliest being some time in 2H17, provided the Eurozone economic recovery continues and inflation (gradually) rises toward the ECB's target of near to 2%. In all, we see a mildly bullish effect on EUR/USD. That said, a move above Mon’s high of 1.0796 would not be surprising although thick option-related offers near 1.0800 (€3.7b of 1.08 strikes expiring today and tomorrow) may pose an initial hurdle.
SEB: ECB To Lean Towards The Dovish Side.
SEB expects: Rates unchanged QE extension by 6m, current pace of QE (EUR 80bn/m) maintained. Remove deposit rate floor to ensure QE implementation. ECB to lean towards the dovish side to avoid provoking a further surge in yields. Q&A session. ECB to confirm downside risks to growth, inflation and of its easing bias Repeat that ECB policy is effective and that the focus is on policy implementation. Deny “ECB taper” rumours, reiterate the ECB has the will, capacity and ability to act. Repeat call for swift implementation of growth-supportive fiscal policies and structural reforms. Potential market reaction: Largely neutral, our expectations are broadly in line with consensus.
RBC: QE Extension And No Tapering In Sight.
The ECB faces a familiar trade-off when it meets later this week. Despite recent rises in the headline rate, the inflation backdrop is still weak and we do not anticipate that the new set of staff forecasts will show a return to the ECB’s inflation target before 2019. Though the euro area’s economic recovery will continue over the forecast horizon, growth remains too weak to push underlying inflation firmly upwards and risks to the outlook, particularly political risks, have intensified since the last meeting in September. Given that backdrop, we expect that the Governing Council will come out in favour of more easing in the form of continuing its QE programme. But a lack of available bonds means that the question of how they will achieve that remains. To extend the QE programme until at least September 2017, we expect that the ECB will water down the deposit rate floor – essentially allowing purchases below the -40bp threshold thereby unfreezing the currently unavailable assets. That should get the ECB towards a September 2017 threshold (depending on assumptions) but not much beyond.
UBS: ECB to extend QE in its current form (€80bn monthly) by six months to Sept'17
According to our base-case scenario, the ECB will announce a six-month extension of QE, from March to September 2017, with ongoing purchases of €80bn per month; such a decision would seem broadly in line with market expectations. While the new staff macroeconomic forecasts for 2017-19 will form an important basis for the decision, we think the members of the ECB Governing Council will have to take an even more comprehensive view, evaluate the broader balance of risks, and ask themselves whether the time is ripe for a reduction in monetary stimulus. In this context, the GC will also have to consider the implications of political events, such as the outcome of the Italian constitutional referendum on 4 December and the sharp rise in global bond yields which has probably led to an (unwelcome) tightening of financial conditions in Europe. We currently expect the ECB to taper after September 2017, perhaps over the course of one year. We do not think ECB policy rates will be cut further, but rate hikes are unlikely before 2019.
UniCredit: ECB To Preserving Monetary Accommodation Via Extending QE Beyond March 2017.
On Thursday, we expect the ECB to announce a six-to-nine-month extension of QE beyond March 2017, at the present pace of EUR 80bn per month. We also think that the central bank will raise the ISIN limit to 50% from 33% and switch to a more flexible definition of deposit-rate floor, applying it to a portfolio of bonds rather than to each individual security....The decision to keep buying assets at the pace of EUR 80bn per month would be mainly intended to preserve the current “very substantial degree” of monetary accommodation, at a time of limited progress towards a “sustained adjustment in the path of inflation consistent with the Governing Council’s inflation aim”. Any other policy option, be it tapering or a one-step reduction in the monthly purchases, would lead to tighter financial conditions, because investors would (correctly) interpret such moves as deviations from the ECB’s reaction function, possibly due to political reasons. As a matter of fact, in the QE framework, it is the pace of monthly purchases that sends the most powerful market signal. Therefore, any reduction in the flow of purchases (say to EUR 60bn) would ultimately represent a net tightening, even if the Governing Council were to try to offset this with a long extension of the program (for example until March 2018).
Danske: Too Early To Expect An Announcement On Ending QE.
We expect the ECB to extend its QE purchases by six months to September 2017 and maintain the EUR80bn monthly purchases. The continuation of the QE programme should follow as inflation – despite the outlook for an increase – is still not on a sustained path towards the 2% target, which the ECB has defined as the condition for ending the purchases. Lately there has been a lot of speculation on QE tapering, but in our view it is too early to expect an announcement about ending QE. Very prominent ECB members including President Draghi have increasingly emphasised the lack of upward pressure on underlying prices, which together with an expected considerable downward revision to the ECB’s core inflation forecast, should convince enough of the ECB members that it is too early to consider an end-of-easing. We expect the ECB to publish an inflation projection which is close to the one from September but not very optimistic on 2019. Especially the core inflation outlook should be lowered, reflecting a lack of upward pressure on wages due to slack in the labour market. For headline inflation, the ECB is likely to project 1.2% in 2017, 1.5% in 2018 and 1.7% in 2019.
ABN AMRO: No Time For Taper; ECB To Extend QE To September 2017.
We expect the ECB to announce an extension of QE at the current pace to September 2017 from March 2017. There has been some speculation that the ECB may either extend at a slower pace (possibly for longer) or possibly extend at the current pace for 6-months, but send some kind of signal that tapering is likely thereafter. One of these options might be attractive from the point of view of generating a wide consensus in the Governing Council. However, it would not make too much sense as markets would focus on the slower pace/future tapering signal rather than the extension. This means the tightening of financial conditions that the ECB would seek to avoid may actually be triggered by such an announcement. For this reason, we expect an extension at the current pace, with the ECB refraining from the t-word. The recent rise in bond yields has helped to increase the eligible universe for ECB purchases. However, the ECB would still need to change the rules of its programme to further increase this universe if it is to make space for an extension of QE. We think the ECB will likely drop the restrictions on not being able to purchase assets below the depo rate and below a 2y maturity. This seems the most straightforward option to us. The Governing Council could also allow more flexibility for substitute purchases, though we expect continued limited deviations from the capital key.
Nordea: ECB To Prolong QE Without Tapering For 6 Months.
We expect the ECB Governing Council to continue to ease monetary policy at its meeting on 8 December and by doing so to distinguish its policy further from the rising US yields. The main emphasis will be on the asset purchase programme (APP) which we expect to be extended by six months until end-September 2017 with the current monthly pace of EUR 80bn. The prolongation of the programme is likely to be coupled with a message of being ready for even further extensions, if necessary. We wouldn’t completely rule out the possibility that the ECB reduces the target amount (and possibly extends by more than six months). However, that move would almost inevitably be interpreted as a tapering signal which we think the Governing Council wants to avoid. The fear of giving such signals is especially strong at this point where the ECB wants to distinguish its monetary policy from the rising rates in the US due to different inflation outlook in the two economic areas. In order to be able to run the programme efficiently, the ECB has to change its technical parameters.... Regarding forward guidance, the ECB will likely stick to the wording that rates are expected “to remain at present or lower levels for an extended period of time, and well past the horizon of our net asset purchases.” However, we do not expect any changes in the central bank interest rates. Further moves deeper to the negative territory would require a real threat of deflation to materialise which is currently not the case.
source