Deposit rate and QE the main factors
Thursday's ECB rate decision is main event on the economic calendar this week.
QE
The current program purchases 60 billion euros per month and expires in September 2016 for a total of 1.1 trillion euros. The amount of monthly purchases and duration of the program are the two factors to watch but the total value is a good lens to view it through.
There is considerable talk about 15-20 billion more euros per month but the risk is that the ECB can't find the bonds to buy. Evidence is that they're looking at the muni bond market and buying bank loans.
In terms of timing, most expect an extension through the end of 2016.
I view the risks as euro-positive on this front. They're supply constrained and may not want to announce an extension of bond buys until closer to September 2016.
Deposit rate
The -0.20% deposit rate was said to be the floor when it was first introduced but the experience of the Swiss and other suggests that it can be lowered further. That's what the ECB is likely to do with chatter about a cut to -0.30% or -0.40%. The ECB has also floated the idea of a two-tier system where some deposits at a better rate than others. The details of how that might look aren't flushed out yet.
My guess is that the risks here are euro-negative in terms of a larger cut to the deposit rate. The Swiss are at -0.75%, why not the ECB?
What's the trade?
I think the knee jerk will focus far too much on QE and ignore the deposit rate. So if the euro rallies and the deposit cut is larger, I'll short the bounce. At least that's my thinking 2 days ahead of the decision.
