Market participants will be eager to hear what Draghi and Weidmann have to say today following comments by Constancio yesterday which were received as supportive of sovereign QE. Constancio said that the ECB could decide to buy sovereign debt in Q1 2015, in proportion of ECB’s capital keys, if the adopted measures failed to lift its balance sheet. More importantly, he offered new fundamental justifications for sovereign QE, saying that the effect would go “well beyond the direct effect on the yields of the purchased securities” and that the moral hazard argument was not valid.
Bundesbank President Weidmann may see an opportunity to express his disagreement today, while Draghi could send some final signals ahead of the 4 December policy meeting.
Inflation (preliminary November CPI releases in Germany and in Spain) and money data (October M3 report, at the time of the AQR release) are expected to remain on the weak side. We forecast 0.6% YoY harmonised inflation in Germany (0.7% in October) and - 0.3% in Spain (-0.2% in October). Uncertainty is very high regarding the German figure, as the unpredictable ‘package holidays’ component could easily add or subtract 10/20bp. Beyond the November figure, we expect extremely weak inflation data at the Eurozone level, typically close to 0.2% YoY in December and January, once again because of the drop in oil prices.
EUR: Stability report unlikely to paint rosy picture.
With FX markets still intoxicated by the ECB’s now free-flowing ECB QE rhetoric – the latest round from Governing Council member Constancio – today’s ECB Financial Stability Report could make for sobering reading.
Indeed while the report is unlikely unleash fresh concerns on the state of the EMU financial system it will certainly remind investors as to the extent of the underlying fiscal problem needing to be solved. Thus with many readers already asking whether the ECB is ‘legally able to back-up its sovereign QE threat with actual purchases, a small but growing group are likely asking an even more important question: ‘If sovereign QE does represent the end-game in terms of “whatever it takes”, can it more than temporarily compensate for an absence of Eurozone structural reforms?”.
Given such questions, it is difficult to make a contrarian case for EUR/USD strength (other than from a shortterm positioning-led correction) and we look for currency weakness in 2015.