"Unlike the September ECB meeting, at which there was 'no discussion'
of additional easing measures, it is possible that the ECB press
conference hints that the Governing Council did discuss additional
easing.
Given EUR/$ is above 1.13 in the top half of the recent range, with
short positioning in EUR continuing to decline, and because the ECB is
unlikely to want to encourage a stronger EUR from here, we continue to
favour EUR/$ lower.
Should we get a surprise easing announcement, we would expect
the EUR to trade lower, particularly in the scenarios of either an
increase in the run-rate of QE or a cut to the deposit rate - by our
estimates, a cut in the deposit rate of 10bp would be worth around 2 big
figures in EUR/$," GS projects.
"However, our base case is that the ECB would first opt for an extension of their current QE program beyond September 2016. Stepping
up the pace of QE or cutting the deposit rate would likely only be in
response to an intensification of external risks and / or a sharp move
higher in the EUR.
As we wrote recently, we think that should the ECB signal their
intention to keep bund yields stable, that is likely to reignite the
portfolio rebalance channel - pushing investors out of Bunds into risky
and foreign assets and weighing on EUR," GS adds.
"The single most important task for President Draghi and the
Governing Council is to clarify their message at coming ECB meetings.
Even if there is no near term QE augmentation or deposit cut, a lot can
be achieved simply by stabilizing bund yields at a reasonable level
(again, what matters is stability foremost), much as the Fed or BoJ did
from the start of their QE programs
And while base effects are really old news, we think the time to fix
things is at one of the coming meetings, since headline inflation will
jump once the December and January base effects come off. There is a
need to fix ECB QE and the time to do that is now," GS argues.
