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Article / 04 September 2014 at 12:21 GMT

Now we've seen the cut, what will Draghi say at the conference?

Blogger / MoreLiver's Daily
Finland
  • ECB cuts main refinancing rate to 0.05% from 0.15% 
  • Possible surprises – will ABS/covered bond purchase plan be revealed? 
  • Consolidation on cards for exchange rates

By Juhani Huopainen

The European Central Bank’s press conference began at 11:45 GMT and can be watched live here. After ECB president Mario Draghi’s speech at Jackson Hole, analysts have been second-guessing what he meant with what he said, and whether Draghi actually had a hidden message or two to Germany. 

I am trying to avoid second-guessing everybody by looking here at the consensus views; how they have changed; the recent market reactions; and then list some possible surprises.

Old consensus view: dovish and QE threat

The consensus toward the end of last week was that Draghi will present a dovish message in continuation of his speech at the Jackson Hole meeting, possibly presenting further information and even a tighter schedule for the asset-backed securities programme. Also, some ideas on what conditions would be first have to be seen before a full-blown quantitative easing were expected to be presented.

Latest consensus: wait-and-see

After some time thinking, many commentators have begun to doubt the amount of dovishness Draghi can offer for now. The ABS-programme will take a lot of time to implement correctly, and until the design, required regulatory changes (some of which are not in the hands of the ECB) and participation by the banking sector are in place, not much concrete information can be provided. QE, while still an option, is less useful and much more difficult to implement in Europe than in the US, and Draghi’s Jackson Hole-speech also talked about this.

Draghi’s pledge for easier fiscal policy and more inflationary policy in Germany is largely seen as the key point of the Jackson Hole speech. Draghi is making an implicit threat: if Germany does not ease its purse strings and drop its inflation phobia and balanced budget-mantra, the ECB would in time be forced to introduce QE. The obvious danger is that Germany halfheartedly promises to do what the ECB hopes, but never delivers, and the implementation of the QE would be delayed, and eventually be made in too small amounts for a too short time.

The differences between US and euro area, and the experience from US and Japan, suggests that QE in Europe would have to be massive. I doubt Germany would allow that. The most probable outcome is that Germany fails to deliver easier policy, and the ECB is eventually allowed to do a small QE for a short time. And when it fails, the opponents of QE can say “see, I told you so”.

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A second-guessing game: Will Draghi present a dovish message in continuation of his speech at Jackson Hole, or will today's ECB speech offer some surprises? Photo: Thinkstock

Possible surprises: ABS-details and TLTRO-adjustments


The ECB could commit to a date and a target amount for the ABS-programme – something that a last-minute leak seems to suggest

The ECB could also ease the terms of the TLTRO even further, which would make sense to do now, as when the first allotment becomes available on September 18, the terms could not be changed. By lowering the interest rate of the TLTRO even further the ECB could ensure a higher pick-up. The latest surveys suggest that the ECB’s earlier projections of the banks’ appetite for TLTRO could be too optimistic.

Market implications: consolidation

The shift in expectations also shows in the exchange rates. After dipping to a marginal new low last Monday, the EURUSD has traded in a narrow range. During this week the EUR has gained in value against the other major currencies, and only the strength of the USD has kept the EURUSD at unchanged levels.

During the EURUSD’s fast fall, there have been two occasions of the pair range-trading before continuing its fall. With the psychologically-important 1.30 level already close, and possibility for a wait-and-see from the ECB, there is a possibility that the pair will enter a period of consolidation and wait for the TLRTO in few week’s time. The chance of a correction higher is also real – all that is needed is a disappointment of the markets that the QE does not seem to be coming in the shape and form that would be required.

Fortunately, possible disappointment over QE would lead to outflows from the peripheral bond markets, which would weaken the euro. My base guess is thus a period of consolidation.

Charts: Equity markets show a loss of momentum, USDJPY and EURJPY near resistance levels, EURUSD's bear move has had two previous consolidation periods, close-up shows possible scenarios of a move to a new low and consolidation.

Sources: Saxo Trader, MT4
Equity daily
FX daily
eurusd fall eurusd fall close
5y
Juhani Huopainen Juhani Huopainen
I think the rate cut came to soften the impact of "still waiting TLTRO, ABS under construction, QE possible but unrealistic"-message. The rate cut was a very good move from the ECB - it shows they are serious and not constrained by Germany this time - thus signaling that the forthcoming measures will not be diluted. This also puts a cap on the EURUSD, as the ECB signals that it can and will cut rates in the future as well, if needed. Then again, now expectations are running even higher, and meeting them is also harder.
5y
danevagirl danevagirl
This comment has been redacted

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