Monday at 14:00 GMT the ECB will announce how many bonds they bought this week and the cumulative amount of the program since it began last spring.
Normally they then announce a tender to drain the equivalent amount of liquidity from the market that they have added via the bond purchases. That is referred to as “sterilization” ; essentially keeping the money supply unchanged by withdrawing the money added to the system via bond purchase.
The ECB caught the market by surprise yesterday by saying very little on any plans to step up bond purchases. Traders expected a major splash. Instead, the ECB entered the market and acted decisively to buy Irish, Spanish and Portuguese bonds, driving yields and spreads lower and prompting a wave of EUR/USD short-covering.
Could the ECB surprise the market again on Monday and announce that they will no longer sterilize their bond purchases? That would weaken the euro and give struggling economies like Spain, Greece, Ireland and Portugal a potential kick-start.
Bond markets would be supported by the purchases, tamping down sovereign debt instability while the weaker euro would support the economy.
Germany would have a stroke, of course, but who would have expected Germany to approve two bailouts of EU states?
Odd are the ECB will continue to sterilize any bond buys as usual. But be prepared to hit a bid if they surprise the market and shift course unexpectedly, again.
