ECB: Draghi to maintain a balance - SocGen

Kit Juckes, Research Analyst at Societe Generale, suggests that the ECB President Mario Draghi’s challenge at today’s Council Meeting is to broker a deal whereby he doesn’t disappoint market expectations of an extension of the current (EUR80bn per month) asset purchase programme, while satisfying the demands of the more hawkish elements in the Council who want the pace of asset purchases to slow given the prospect of rising (but still low) core inflation and steady growth.

Key Quotes

“It’s a fine balancing-act which may be achieved by extending the programme without specifying the pace of buying, or maybe could see an extension with a shorter period of commitment to EUR 80bn/month.”

“EUR/USD seems to be driven by a combination of real yield differentials and recently) peripheral spreads in the FX Outlook, 'Playing with fire'. The 10year real yield differential has narrowed by 12bp and the BTP/Bund spread by just over 30bp since late November. Any failure by the ECB to commit to continued asset purchases at the current pace risks de-railing the recovery in BTPs and stopping the Euro’s bounce. After the French elections, ECB tapering risks reversing the ‘crowding-out’ of European investors from domestic bond markets which has been so successful in keeping the euro down but for now, I’m more concerned about the possible impact on peripheral spreads (wider = weaker Euro) than on Bund yields (higher = stronger euro). Short EUR/SEK and EUR/NOK appeal here.”