* There were ‘no’ surprises on the rate front from the ECB on Thursday – Draghi and company voted to keep the main refinancing rate (+0.05%) and the deposit rate (-0.2%) on hold.
* Despite Draghi seeming to be cautiously optimistic, nevertheless a percentage of the market continues to have doubts whether the ECB QE program will prompt a meaningful eurozone economic recovery or eradicate the threat of deflation.
* Have the ECB set the bar too high? – Draghi stated that that the recovery is continuing and that business and consumer sentiment are rising. These are certainly variables that have allowed policy makers to revise up its growth forecasts. 2015 – +1.5% (+1%), 2016 – +1.9% (+1.5%), 2017 – +2.1%
* Cannot say the same for inflation. This year’;s forecast was revised lower to +0.0% from +0.7%. Like all Central Banks have being saying this is expected to be a temporary scenario. The ECB’s new 2017 projections see inflation backing up to +1.8%. Lower crude prices coupled with a weaker EUR and QE is expected to get the job done.
* These are certainly all-good reasons “not” to deviate from the plan to purchase €60b (beginning on March 9) of public and private sector assets each and every month until September 2016 (or beyond to get the job done).
* Other details on QE: Purchases begin next Monday March 9. National Central Banks (NCB’s) will be able to buy assets with maturities between 2 & 30 years (weighted according to outstanding amounts). NCB’s can buy negative yielding debt up to -0.2% (deposit rate). This will be seen as an incentive to buy other assets rather than just depositing monies with the ECB.
* Market is worried that the size of the program (percentage of GDP, the size is only 50% of what the U.K and U.S implemented) will be ineffective and with yields already so depressed investors and analysts should be looking to the value of the EUR to be carrying the heavy load.
* In the Q&A, Draghi’s comments on Greece have done little to reduce the risk of a disorderly default. The ECB continues to take a tough line with the country and has put the onus back on the Greek government to ratify “reforms” to allow bailout payments to resume. Nevertheless, Draghi confirmed that they had agreed to increase the ELA line (from €68.3b to €68.8b). This incremental increase will do little to install any more confidence in the Greek banking system. He also confirmed that the earlier waiver allowing banks to use Greek bonds as collateral for cheaper funding would not be reinstated until a list of reforms was agreed with the Eurogroup.
The 19-member single currency did get an initial boost from Draghi’;s optimistic growth expectations (€1.1080), but has not been able to maintain its strength as the market is left with more question rather than solid answers. The fact that Draghi’;s seems to be in for the long haul has the market back to selling EUR’;s and wishing to buy more equities. The EUR continues to press their case and have taken out the psychological €1.1000 barriers, while triggering stops below to print a new 11-year low at €1.0988. Long-term EUR bears continue to eye 2003 September lows €1.0762
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