ECB taper rumours lack credibility - MUFG

Derek Halpenny, European Head of GMR at MUFG, suggests that on a quiet trading day with little in the way of news to give the market direction a Bloomberg story on ECB monetary policy filled the vacuum and provided the euro with a brief period of volatility.

Key Quotes

“However, the surge in EUR/USD from around the 1.1160 level to close to 1.1240 on the ECB tapering QE looks like an over-reaction to what contained very little in the way of surprise. The ECB was always expected by the markets to build in some form of tapering to QE when the correct time arrives given the unlikelihood that the ECB would go from purchasing EUR 80bn worth of securities one month to nothing the following month. Bloomberg also reported that the timing of ECB tapering that the Governing Council had reached consensus on would be dependent on the economic outlook. That of course is an obvious conclusion and Bloomberg was not reporting that consensus had been reached on when to begin tapering merely that some form of tapering program would be the most appropriate course of action to take when the time arrives.

Recall from the September monetary policy meeting two important points. Firstly, the ECB maintained its view that its baseline scenario “remains subject to downside risks”. Secondly, the ECB actually lowered its inflation forecast for 2017 from 1.3% to 1.2%. The ECB may well struggle to achieve the 0.2% goal for this year. A look at market measures of inflation expectations do not suggest ECB concerns over lifting inflation will have eased since that meeting. The 5yr/5yr inflation swap rate has remained close to record lows in a 1.30%-1.40% range since June and currently is at 1.33%. The last step the ECB would want to take now would be to formally signal to the financial markets that its easing stance will be reversed.

While we would agree with the view that monetary policy divergence no longer has the ability to drive the euro weaker, yesterday’s spike does also indicate that the stance of the ECB is helping to thwart the euro from advancing. A formal signal of an end to QE would no doubt see EUR/USD advance sharply.

Finally, while we agree QE may have become counter-productive by acting as a source of uncertainty for corporations that deters long-term business decision-making, in the euro-zone it is clearly playing a role in keeping sovereign debt markets stable. The high degree of political uncertainty ahead and the recent increased doubts over the euro-zone banking sector all point to the ECB refraining from taking a risk by signalling at this stage the beginning of the end of QE.”