By Dean Popplewell
The EUR bear finds out his or her own fate in a matter of hours. Will Mario Draghi and the European Central Bank (ECB) stand and deliver what’s rumored and expected of them? It’s always conceivable when dealing with European policymakers that they could come up short on their commitment to overcome the eurozone’s growth and low inflation problems. They are not the most proactive of policy committees. The euro bear will either be basking in glory or the market will collectively punish the ECB for further shortcomings, as there will be market volatility. Draghi, the ECB’s president, is required to sell whatever deal the central bank puts forth to the public, making his post-ECB press conference this morning more important than “the” official announcement.
Of Rumor and Innuendo
The first bit of information about the possible size of the ECB’s bond-purchase program filtered throughout the market yesterday, but the final details could contain surprises. Rumor and innuendo never trump what’s written in black and white.
Released stories suggested that the ECB would be buying €50 billion in sovereign bonds each month for either one year or possibly through the end of 2016, for a minimum total purchase amount of €600 billion. Up until now, the majority have been expecting the ECB would announce a quantitative easing (QE) package worth €500 billion to €700 billion. The single unit’s initial reaction was to surge toward the €1.17 handle before retreating to current levels (€1.1620) — a typical “buy the rumor, sell the fact” trade reaction. But the final details and breakdown this morning could well contain surprises.
EUR Bears Need a Jolt
The market needs to be surprised on the size and makeup of the program for the euro bear to garner further profits by pushing the EUR firmly through its 11-year low, and open the door toward €1.10 and even parity.
For this to happen, the ECB needs to announce a combination of surprises:
- An open-ended program with purchases tied to the achievements of a certain level of inflation
- An explicit target well above the market consensus €700 billion
- The entire balance sheet expansion is done by buying sovereign bond only
- Expand its balance sheet by €1 trillion and rely on sovereign bonds
- Or front load the program with sovereign bonds
A blend of the above points will always see some short-EUR profit being taken off the table, but once investors have interpreted the finer details, it should convince bearish EUR traders that their short positions remain in good standing.
Draghi’s Sleight of Hand
The ECB’s goal (fueling inflation and pushing it back to the +2% mark) needs a significantly weaker EUR, which is unlikely if the central bank caps the size of any sovereign debt program at €500 billion to €600 billion. The market has already priced these numbers into the equation. It’s the surprise that will maintain the bearish momentum; otherwise the short EURs will be punished. The trick for Draghi in the press conference is that he will be required to give the perception and illusion that the ECB has more ammunition in the background.
The market needs to be convinced or the ECB will be punished and the EUR will be trading much higher, periphery yields pushed up from their ultra low yields, and euro equities seeing red.