22 Jan 2015
Remain short EUR/USD into ECB meeting – TDS
FXStreet (Barcelona) - The TD Securities Team suggest that the clear market bias is to remain short EUR/USD into the ECB meeting, and further add that there is not chance that the ECB might announce a buying of less than euro 500bn.
Key Quotes
“A pledge of buying €500bn over the next two years is expected and in the price, with key questions on the modalities likely to colour, as well as obfuscate, the market reaction.”
“We think investors should focus on the clear skew to this decision. There is virtually no chance that the ECB announces less than this, with the biggest downside risk that they announce the plan but aren’t ready to implement it within the next month. But this seems like a 10% chance to us, with another 15% chance that the ECB announces QE in line with expectations but the modalities in terms of risk sharing or lack of clarity in terms of the pace of buying, leave markets underwhelmed. This leaves us with a 75% chance the ECB meets or beats market expectations in a positive way with this decision.”
“We expect the ECB to announce €500bn across EGBs by capital share but with restrictions on Greece and Cyprus, and frontload those purchases and set up a natural rendezvous to reassess its extension within the next year so that a risk of more remains. The latter is key to avoid market disappointment.”
“Due to liquidity conditions, they are likely to keep the private sector buying to its current pace and continue to target two years, with the addition of private sector corporate bonds as 50/50 and more a sideshow to the sovereign bond contingent.”
“.. we think the ECB’s goal in buying sovereign debt is to increase the size that they can buy starting in February and reinforce medium-term inflation expectations now while they are most at risk due to falling oil prices and CPI, and this means buying more over the next 12 months and leaving the future more open.”
“The clearer market bias is to remain short EURUSD, as the direction for fixed income will be much more difficult. But if the ECB surprises us with a commitment of “at least” one trillion in EGB purchases, we would expect EURUSD to trade through parity by year-end.”
Key Quotes
“A pledge of buying €500bn over the next two years is expected and in the price, with key questions on the modalities likely to colour, as well as obfuscate, the market reaction.”
“We think investors should focus on the clear skew to this decision. There is virtually no chance that the ECB announces less than this, with the biggest downside risk that they announce the plan but aren’t ready to implement it within the next month. But this seems like a 10% chance to us, with another 15% chance that the ECB announces QE in line with expectations but the modalities in terms of risk sharing or lack of clarity in terms of the pace of buying, leave markets underwhelmed. This leaves us with a 75% chance the ECB meets or beats market expectations in a positive way with this decision.”
“We expect the ECB to announce €500bn across EGBs by capital share but with restrictions on Greece and Cyprus, and frontload those purchases and set up a natural rendezvous to reassess its extension within the next year so that a risk of more remains. The latter is key to avoid market disappointment.”
“Due to liquidity conditions, they are likely to keep the private sector buying to its current pace and continue to target two years, with the addition of private sector corporate bonds as 50/50 and more a sideshow to the sovereign bond contingent.”
“.. we think the ECB’s goal in buying sovereign debt is to increase the size that they can buy starting in February and reinforce medium-term inflation expectations now while they are most at risk due to falling oil prices and CPI, and this means buying more over the next 12 months and leaving the future more open.”
“The clearer market bias is to remain short EURUSD, as the direction for fixed income will be much more difficult. But if the ECB surprises us with a commitment of “at least” one trillion in EGB purchases, we would expect EURUSD to trade through parity by year-end.”