At its meeting today, the ECB introduces a QE program of €60bn per month across ABS, covereds, government, corporates, and European agencies until end-September 2016 and beyond until inflation is consistent with target. The following are a selection for the reactions to this decision and what does it mean for the EUR going forward as provided by the FX strategists at 10 majors banks – 2 of these banks (HSBC & BofA Merrill) have already cut their EUR forecasts following today’s ECB move.
SocGen: The euro can’t keep falling without correction while the risk markets rally, but we’re no wiser on the need for correction in EUR/USD. The size of the package means the biggest winners are high-beta currencies. My recommendation this morning was to sell EUR/PLN. That isn’t the best-performing trade so far but short euro versus ‘currencies with a bit more yield’ will be today’s catch-all. EUR/USD will be a good bit lower in 1, 3 and 6 months, but won’t fall in a straight line.
HSBC: By rights, some of the ECB’s action should already be in the price of EUR-USD, which has fallen from 1.40 since hints of QE by the ECB became more blatant since mid-2014. It discourages us from embracing the more sensationalist forecasts of parity for EUR-USD, for example. It has been all about the EUR so far, but once you get below 1.10 then the implications for the US economy start becoming dominant and there could be some US policy push back against excessive USD strength. Nonetheless, for now, the size of the package and the possibility that it could be extended until the inflation mandate is met should mean the EUR continues to come under pressure. We look for EUR-USD to finish 2015 at 1.09 compared to our previous forecast of 1.15.
BNPP: The ECB will buy EUR 60bn per month between March 2015 and September 2016, implying at least EUR 1.1trn in asset purchases. Moreover, ECB president Mario Draghi implied that the programme could be extended if needed to raise inflation back to target. The only modestly disappointing element of the package was that 80% of the risk of the asset purchases will be retained on national central banks’ balance sheets, rather than distributed across the system. The EUR has fallen significantly and against a broad range of currencies in response to the decision, consistent with the central bank having exceeded expectations. Our positioning indicator suggests markets were not overly positioned for EUR weakness going into the ECB meeting and have room to add to short positions. EURUSD and EURGBP have already traded through our Q1 targets but we continue to target 1.12 and 0.75, respectively, for these pairs in Q2, and 1.10 and 0.72 by the year end.
BofA Merrill: Following the aggressive ECB action, Bank of America Merrill Lynch is marking to market its EUR/USD projections, keeping a weakening path. “Ahead of the most anticipated ECB meeting in recent years, we had argued that the risks for EUR/USD were balanced, but also pointed to downside risks to our projections,” BofA argues. “We still see a gradual weakening of the Euro as Fed and ECB monetary policies diverge. After this week’s ECB policy announcements, we do not expect any aggressive further steps for the rest of the year. Our US economists expect the Fed to start hiking rates in September, with risks that it may be later. Such a divergence of monetary policies should continue weighing on EUR/USD in the long term, but it will have to be faster than markets currently expect to lead to a much further weakening of the Euro in the short-term. Moreover, short positioning could suggest some small upside Euro risks in the short term from profit takin. “We are now projecting EUR/USD at 1.10 by the end of 2015 and 1.05 by the end of 2016, a change from 1.20 and 1.15 respectively before
Barclays: We think these decisions should help re-anchor medium-term inflation expectations, reinforce forward guidance and lift growth prospects owing mainly to further weakening of the currency and improving financial conditions. However, for the recovery to be sustained, additional structural reforms will be necessary, The anticipation of today’s ECB decision has already driven debt yields and the effective exchange rate of the euro significantly down over the past few months. The latter fell again significantly last week after the SNB’s decision to give up the floor gave a boost to the euro depreciation. It is likely that today’s decision is also going to have implications for other central banks in Europe, through the exchange rate channel (Denmark, CEE, Sweden and even the UK).
Credit Agricole: the ECB’s commitment looks flexible enough to adjust the size of asset purchases if needed as the latter will continue “in any case” until the ECB sees a “sustained” improvement in the inflation trajectory. We do not think that more QE is needed at this point, but if the facts change the ECB’s programme can be adjusted accordingly. The easing of TLTRO through a suppression of the 10bp spread over MRO rate is another positive that could boost demand at the margin and support the ongoing turnaround in the Eurozone credit cycle.
Danske: The initial reaction in EUR/USD is fair: this is EUR negative due to the sheer size and the open-ended nature of the programme. EUR to stay soft in the near term as markets digest this – also with Greek election and uncertain Russian situation looming in the background. But, if we are right in projecting a euro recovery in H2 and that risk markets should perform on this, this should eventually turne EUR positive. Alongside a bottom in oil prices and past EUR weakness this builds the case for a euro rebound on a 6-12M horizon. We still target 1.10 in 6M followed by a shallow rebound to 1.12 in 12M. That is, the euro will be weak now rather than later. ECB has now officially joined the global currency war with its long awaited QE scheme – and indeed, a weaker EUR is a key channel through which ECB QE could help spur a euro-zone recovery.
BTMU: From a financial market perspective, there certainly doesn’t appear to be the “wow” factor that followed other QE programs, which was always the likeliest outcome given the build-up to this announcement. The Euro Stoxx 50 is 1.0% higher and 10-year German bund yields are 7bps lower at 0.46%. This announcement is certainly enough to reinforce the monetary policy divergence with the US and assuming continued economic strength in the US, yields there will be much more attractive, which should ensure continued capital switching from the euro to the US dollar. A lower EUR/USD in 2015 is clear. Indeed our current 1.1200 year-end forecast may need to undergo some downward revision given the scale of the drop in January. However, we still think this program doesn’t preclude the potential for some temporary recovery in EUR/USD. An 11-big figure drop since 16 th Dec is large and a dovish FOMC statement next week might open up a scenario of a short squeeze in EUR/USD with the key risk event now pass.
Nomura: The announced programme (€60bn per month of total asset purchases) shared some important similarities with our expectations: the flow approach, the open-endedness via state dependency and most of the assets we expected (sovereign bonds, agencies, supras, linkers and floaters). For us, this flow-based approach and state dependency was the key requisite for the market being surprised to the upside and a major feature of the programme that should allow market participants to form their own expectations on the duration of the programme depending on their own inflation expectations. On balance, we believe this is a better outturn than expected because of the stronger volume and open-endedness of the programme, despite the more negative decision on loss-sharing. At this stage, we believe it more likely than not that the ECB will be forced to continue its asset purchases beyond September 2016.
NAB: Our central expectation going in to the ECB meeting was that President Draghi would try to exceed expectations. He is a past master of this, very skilled at manipulating opinion and then overdelivering. The problem is that markets have got increasingly used to this tactic, with the ‘whisper number’ for QE over EUR100bn higher than the EUR500bn which had been floated by his Executive Board colleagues just a couple of weeks ago. In the event, and with some presentational double-counting, he was able once again to produce numbers which beat consensus. The answer to yesterday’s question “how many different big figures will EUR/USD trade on after the announcement?” was four, although it was one-way traffic rather than being particularly volatile.
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Look, Asia … I love ya and all … but seriously … is this all ya got for the EUR/USD today?