The European Central Bank (ECB) delivered another monetary policy “bazooka” overnight, says ANZ, extending its quantitative easing program by EUR 540 billion and tweaking the criteria of securities it can purchase, allowing for bonds with a minimum one-year maturity and those yielding below the ECB’s deposit rate of -0.4% to be eligible for the program.
After initially being perceived to be a hawkish announcement due to monthly asset purchases being scaled back to “only” EUR 60 billion from April next year, down form the current pace of EUR 80 billion, the euro quickly reversed course and started to head lower, undermined by the view expressed by the ECB that purchases will occur “until the Governing Council sees a sustained adjustment in the path of inflation consistent with the inflation aim”.
As Brian Martin, head of global economics at ANZ in London noted after the announcement, the ECB now reserves the right to adjust upwards or extend the QE programme if needed, effectively leaving current policy open-ended.
QE-indefinitely, if required.
Based off the ECB’s updated growth and inflation forecasts released overnight, Martin thinks that ECB’s bond buying spree is unlikely to end come this time next year, suggesting that it could be years until the bank ceases asset purchases, let alone considering hiking interest rates.
“We know that ECB President Draghi thinks an abrupt end to QE is unwise,” he says.
“Assuming that the ECB’s inflation projections materialise as planned and core inflation recovers sustainably next year, then tapering of EUR10 billion per month in the first half of 2018 is, at the very least, possible.
“We also know from the ECB that it is their expectation that interest rates won’t be going up until long after the QE ends, so it would seem that it will be 2020 at the earliest before the ECB begins to normalise interest rates.”
With the US Federal Reserve almost certain to lift interest rates next week, and potentially several times again next year if the likes of Goldman Sachs and other are anything to go by, it suggests to Martin that the weakness seen in the euro overnight will become further entrenched in the months ahead.
“That provides a very bleak landscape for savers and implies an ongoing hunt for yield and portfolio diversification away from the euro area,” he says. “EUR underperformance against the AUD, NZD and Asia FX can be expected in this environment.”
Martin predicts that the EUR/USD, currently trading at 1.0620, will will move towards parity in coming months.
He also points to heightened political risk in the euro area next year as another factor that could undermine the euro, noting upcoming elections in the Netherlands, France, Germany and potentially Italy as areas that will add to market uncertainty.
“Against a backdrop where the FOMC will be raising interest rates we advise staying short EUR/USD and selling rallies,” says Martin.