ECB not ready to turn off the taps – Westpac
The ECB’s policy meeting next Thursday is shaping up as considerably more interesting for markets than the FOMC meeting a few days later, according to Sean Callow, Research Analyst at Westpac.
Key Quotes
“At the Sep Governing Council meeting, President Draghi said that “Probably the bulk of these decisions will be taken in October”, when asked about the pace of quantitative easing.”
“To recap, the ECB is buying bonds with what is effectively printed money at a monthly pace of €60bn, a program “intended to run until the end of December 2017, or beyond, if necessary.” As of end-Sep, such purchases totalled €2.1 trillion. Many months ago, Draghi said he didn’t think there would be an “abrupt” end to the program. So the debate has been not over whether QE will continue in 2018 but at what pace.”
“Newswire ECB “source” stories claim an internal debate around a considerable slowdown in the pace of QE, from €60bn to €25-40bn from Jan 2018, perhaps tapering along the way to a provisional Sep 2018 conclusion. A decision along these lines should be largely factored in but still could undermine the euro, as the ECB confirms that policy will remain very loose deep into next year. Moreover, interest rates will not be raised until “well past the horizon of our net asset purchases.”
“So we may not see any increase in Eurozone official interest rates until at least 2019. Meanwhile, Fed officials continue to sound upbeat on growth and inclined to raise interest rates somewhat more than is priced into money markets. As the chart shows, the yield premium on a 2 year Treasury note over its German counterpart has risen steeply in recent weeks, arguing for EUR/USD to fall further from the ECB’s sensitive 1.20 area than it has so far. 1.15-1.16 would be no surprise.”
“The US dollar also seems to be finding some support from gradual progress on tax reform, with Republican senators looking more cohesive for now. This adds to the case for AUD/USD to keep struggling in the 0.79-0.80 area near term.”