The old and bold QE strategy
If there is anything well know on the market and traders know about a term or infact are addicted of some thing, it is without any doubt- the Quantitative Easing program. History confirms one thing that when the Central bank does press the trigger on this, one strategy does pay off very well, which is buy the equity market and sell the currency. If we look at Japan, the US and the UK, this strategy has paid off very well. Now, it is the eurozone’s turn, and for the first time in history, the European Central Bank is about the announce the sovereign bond buying program. However, if this could be as effective as it was in the US or in the UK, there are many questions imposed on that, but the central bank is surely hoping to get the same results despite the fact that we have several different government involved and one central bank as oppose to one government and one central bank. Surely, this is the ultimate test for this strategy and it has never been applied before therefore, no one is completely sure how it will impact the end game.
ECB leakages has tested the euro
Yesterday, we had a taster if not starter of what we can expect today and no matter what the news is, extreme volatility is highly expected today across all markets. The rumour of 50 billion euro of QE by the ECB excited the investors first, who applied the same old school strategy (mentioned above), but the effects starting fading away quickly when the participants actually digested the news and realised that it is actually only a rumour and 50 billion euro of QE is not enough.
Yes, the phrase “Not enough” is also very famous and can easily be compared to greediness. Having said that, the 50 billion euro of QE each month means only 600 billion Euro of QE, which is expected by the market and it is really towards the lower end of the market expectation, and if in reality, it is at that time end, it may actually trigger a sell off and we could see short squeeze in the euro trade.
Surprise is a New Weapon for Central Banks
If history serves us correctly, one affair is certain that every time a central bank brings a surprise it causes the biggest move on the market, and only last week’s move by the SNB brought a fresh reminder of this and wiped out some hedge funds along with a few brokers. So, any thing way below the expectations or any number way above the expectation is going to be a surprise, and of course, if the ECB stays pat, that will be the biggest surprise of all.
If the ECB does announce a package above the 700 billion, it will mean that they are aiming for their balance sheet to expand beyond the 3 trillion euro target and are extremely committed to fight deflation and revive growth in the area. The net effect could be a jaw dropping move downward move for the euro and a massive upward spike for the equity market. However, if the ECB cave to Germans and do not announce anything substantial on the package size and its maturity, it may take the wind out of the recent equity rally.
But, most likely scenario will be that the ECB will meet the market expectations and will have the maturity term of 10 years for their QE package. Once again, the investors focus will be if the ECB is buying only the investment grade securities or if they are also including junk bonds with special conditions. The bottom line is that traders wants to know if the ECB is truly independent as they say or they going to care about the German nagging.
Disclaimer: The above is for informational purposes only and NOT to be construed as specific trading advice. responsibility for trade decisions is solely with the reader.