Just over two and a half years ago, London was in the full swing of the Olympics. Bunting was everywhere, gold postboxes popped up on the streets and – briefly – it seemed that all was right with the world. From an economic sense, that summer was also important as it heralded the beginning of a monetary policy in the eurozone that is expected to be realized later on today.
Mario Draghi’s speech back in 2012 that the ECB would do ‘whatever it takes’ to support and repair the eurozone was a sea change for eurozone policy. Such was the confidence boost that the then relatively new European Central Bank Chair gave markets, that they instantaneously started loading up on European debt in the belief that the risk of a default was now diminished and that should the worst come to the worst, the ECB would launch a bond buying program and the debt could be shifted to them.
Today we will see if that mantra of doing ‘whatever it takes’ is still policy or simply a phrase used to stop market bleeding a couple of years ago. In the past Mario Draghi has refused to be drawn on how large the European Central Bank’s ABS purchase plan would be and herein lies the rub; markets love numbers and targets, and without one they will start to doubt the efficacy of the ECB’s plans to help the European economy.
So what can we expect from the European Central Bank’s Governing Council later today then? Well it wouldn’t be an ECB policy initiative without already having a fair few leaks and rumours swirling through markets.
Yesterday’s rumour was that the ECB was considering a plan to purchase around EUR50bn of assets a month until the end of 2016. That would be roughly on par with most estimates of how large this intervention by the monetary authorities could be, however, we hope that the plan is not time restricted but is instead viewed through a prism of where inflation expectations are trending. Stop buying assets when inflation expectations have run higher.
It is that particular sense of irony that exists in markets that a speech that was designed to strengthen the euro is now being used as a policy catalyst to weaken the single currency. I honestly cannot say if the euro will fall on the announcement of a QE plan later today. As we highlighted last week there is the very real chance that traders are looking to ‘buy the rumour and sell the fact’. We have seen a decent bit of euro weakness into the announcement and any announcement that is not received warmly will more than likely see the single currency rise on the session.
Our longer term thoughts remain that the euro is set to weaken through the rest of the year. The policy announcement is due at 12.45 GMT with the press conference to end all press conferences due at 13.30.
Sterling slipped against the single currency yesterday as traders banked profits on the euro and increased their doubts that the UK will see an interest increase this year. The main culprit for this was the latest set of Bank of England minutes that showed Messrs Weale and McCafferty – who had voted for a 25bps increase in interest rates since August 2014 – have re-joined the pack and the Bank of England is back to unanimity on the need to keep rates as they are.
While we have to wait until next month’s quarterly inflation report to see what the Bank of England is truly thinking about inflation, it has become clear that there is a “roughly equal chance” that inflation could dip below the zero level within Q1. It seems that the Bank of England does not seem as prepared to look through these falls in headline inflation as the Federal Reserve, for example, and is therefore happy to lean on the prospects of further falls in wage demands to justify a loose monetary policy. At the moment, however, higher real wages – currently running at 0.8% – is helping UK plc but is doing little to suggest that rate rises are coming anytime this year.
The monetary policy hoopla that has gripped markets was extended yesterday by the Bank of Canada’s surprise decision to cut interest rates. There is no doubt that the Canadian economy has been hit hard by the fall in oil prices but nobody can seriously believe that a 25bps cut in interest rates is going to be enough to reverse the economic decline in the short-term. If the Bank of Canada was looking for a lower Canadian dollar then they got their wish; USD/CAD sits at the highest level since April 2009. Currency markets were pretty dull last year but with the Swiss move last week, the Canadians yesterday and the potential for the ECB to upset the apple cart again today we can only foresee more of this happening. Reserve Bank of Australia, we’re watching you… In the meantime I’m off to find some beta-blockers and lie in a flotation tank.
