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Will Super Mario Stand and Deliver on QE?

  • Will Draghi change market’s assessment of QE?
  • QE program details expected
  • USD on a high as European yields tank
  • EUR positioning pushes currency to new lows

Markets are waiting to scrutinize European Central Bank (ECB) President Mario Draghi’s every word in a couple of hours. Investors and dealers want to know if he will say anything to change everyone’s assessment of the quantitative easing (QE) program announced last January. The market already knows the size, the pace, and area of bond purchases. What we do not know is the actual timing and the ECB’s way of bidding on the bonds. Are we expected to discover these along the way? Or will Draghi clarify the uncertainties in his news conference?

It’s true: the ECB did leave many questions unanswered when it originally announced its QE. Basically, Draghi was more concerned about getting a majority to agree before trying to fill in the “gaps.” Even at today’s meeting the ECB may not be able to deliver much in the way of detail, given the fragmented nature of the 19-markets in terms of size, liquidity, and average maturity.

As the expanded asset purchase program will be conducted through the national central banks, perhaps investors and dealers may have to wait until actual purchases begin to gain greater insight. If that is the case, it does not necessarily mean keeping an eye on 19 different banks and their bond respective markets. There will be differences, and differences will create greater divergence between the various markets. This will make keeping tabs on proceedings a tad easier for interested parties.

When will everything kick off?

The market is betting on three possible dates for QE to begin:

What could surprise investors, if anything?

Consumer spending and economic growth in the eurozone seems to be on a healthier trajectory of late. For some it certainly raise doubts about the need for the ECB to buy eurozone debt to fight deflation risks, particularly given the difficulties the central bank faces in sourcing the bonds. Basic economics indicates that falling prices can lead to lower inflation expectations and on to deferring consumer expenditures — deflation. But on the plus side, falling prices, like in energy, is a tax saving to any household, and it has the potential boost a family’s income, confidence, and eventually spending. This is the typical equation that ECB staff looks at and takes into consideration when forecasting. New staff projections later today are likely to reveal more upbeat growth and inflation predictions.

EUR Remains on the Back Foot

The 19-member single currency is still on the slide as traders position themselves ahead of the ECB decision and possible looming details of its €1.1 trillion QE program. The EUR has managed to print new pre-ECB meet lows in the Euro session this morning (€1.1026). Some dealers are wondering whether the EUR/USD might bounce in the aftermath of the formal announcement under the appearance of profit-taking. The currency has not been this low in 11-years when it based out at €1.0762.

What about fixed income? Since January, investors’ anticipation of the QE program has driven eurozone borrowing costs down to record lows. Any threat of the currency’s fall extending could suggest further outperformance of the likes of bunds versus U.S. Treasurys. Perhaps when investors are given a bit more clarity on the proceedings, then like the potential for EUR profit-taking, the market may see some dealers wishing to take some profit in the bond market and begin pushing up bund yields again.

Hopefully, all will be made clear in a couple of hours.

Forex heatmap

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Dean Popplewell

Dean Popplewell [5]

Vice-President of Market Analysis at MarketPulse [6]
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell
Dean Popplewell

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