19 January 2015
Sales Trader, Client Trading Services, Saxo Capital Markets
Last week's move in the CHF could be the prelude to something bigger from the ECB. While Mario Draghi is widely expected to introduce new measures, it is unclear whether he will deliver the 'shock and awe' package many traders are now expecting.
The European Central Bank (ECB) meets this Thursday to announce its latest policy measures, in what is expected to be a defining moment in the central bank's history.
The Eurozone is in a perilous state; the region slipped into deflation for the first time in December, while economic growth has flatlined. For months ECB president, Mario Draghi, has been building support for a sizable and wide-reaching stimulus programme to spur economic growth in the feeble Eurozone economy. However, he has faced stiff opposition from German policymakers, many of whom believe the ECB's actions are in violation of EU treaties.
Plans to launch a new stimulus programme, however, received a boost last week when a senior official from the European Court of Justice opined that the ECB's existing bond-buying programme was legal under EU laws.
The Swiss National Bank's (SNB) decision to scrap its currency ceiling has also lent support to rumours of a big ECB move on the horizon. Just three days prior to the removal of the ceiling, vice-chairman of the SNB governing board Jean-Pierre Danthine, described the ceiling as a "cornerstone of monetary policy". Some are speculating that the SNB performed a U-turn on its policy after learning of the ECB's planned actions. If Draghi and company are set to introduce measures that will push the euro lower, the SNB may have felt it was no longer able to expand its balance sheet, which already stands at 74% of Swiss GDP.
Draghi vs. Weidmann
Another aspect of Thursday's ECB meeting that will intrigue the market is Germany's reaction to any announcement. Bundesbank president Jens Weidmann and Mario Draghi have long been at odds over monetary policy decisions. Weidmann may well refrain from stealing the limelight from Draghi in order to install credibility to the European Central Bank. If he does not, both the market and the European public may begin to lose faith in the strength of the ECB as an institution, which would be incredibly damaging at a time when Europe is increasingly fragile.
What does this mean for traders?
The scale of the programme is now what the market appears to be debating. Economists surveyed by Bloomberg on Monday said they expected the ECB package to amount to EUR550 billion. Sovereign debt will need to be bought up on a massive scale. Any compromise on this and the foreign exchange market will react in a way that the ECB simply do not want.
According to a report published by Bloomberg on Wednesday, a proposal circulated to the ECB's Governing Council foresees asset purchases of EUR50 billion a month from March to the end of 2016. If the proposal is enforced on Thursday, the ECB's QE programme would amount to EUR1.1 trillion – double that of the market consensus.
A full blown package may begin to show the market for EUR/USD in the low teens and towards parity. As of 11:00 am on Wednesday, EUR/USD was trading around the 1.157 level. The near thirty-five big figure move that was witnessed in EUR/CHF on Thursday January 22nd was quite frankly unthinkable, but a grind lower could be on the cards if the package satisfies investors worldwide that enough is being done to bolster the Eurozone economy.
Should the ECB deliver anything less than EUR500 billion, markets are likely to be disappointed and we could see EUR/USD move towards, and potentially through, the 1.1800 figure.