ECB Preview: Further grounds for normalisation - Nomura

Analysts at Nomura are not expecting the ECB to announce any major changes to its policy parameters at the Governing Council meeting today, however, they are expecting the easing bias on the asset purchase programme (APP) to be dropped via the removal of the phrase concerning the Bank’s readiness to increase its size and/or duration from the forward guidance.

Key Quotes

“It should pave the way for a more formal announcement about the tapering of the APP at the following meeting on 7 September.”

“We believe there is now overwhelming evidence to suggest the euro area and broader world economy are normalising from a post-crisis repair phase. This is clearly why central banks – including the ECB – are readying markets for a (further) normalisation of monetary policy in the coming months. But when thinking how this process may impact markets, it is critical to distinguish between a prospective ‘normalisation’ of monetary policy that’s taking place as other drivers of economic activity are improving from a scenario where monetary policy is being ‘tightened’ because economies are overheating. The former should help prolong an economic cycle by generating greater alignment between the supply and demand for capital and by fending off financial imbalances.”

“Rates: We remain overall positioned for higher rates. The notion of a perceived global tightening taking place has taken hold in markets and is acting heavily on the price action. Unless the ECB is dovish at the July meeting, which is not our expectation, we see little scope for a sharp retracement. We maintain an outright short on Bunds, which we entered into at 33.5bp. In the near term we continue to target 65bp, and in the longer term 90bp. We maintain 10yr US-EUR tighteners in swap space via 6m receivers. We have taken profit on a number of our ECB normalisation trades – recently closing our 4y1y-1y1y Eonia steepener to book a 32bp profit. Given this, we are naturally less exposed to any near-term disappointment.” 

“FX: We see a risk of a slowdown in EUR appreciation. Even though we expect the ECB to change its forward guidance further, the change would not be a big positive surprise for the market. In contrast, no change in the forward guidance or negative comments on the recent market re-pricing from President Draghi could weaken EUR quickly.”