April 03

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Draghi Talks QE

The ECB’s Governing Council remained on hold today, initiating no new easing policy in April.  As discussed in yesterday’s post, the focus was going to be on Draghi’s rhetoric during the statement and Q&A. I was honestly surprised by the extent of Draghi’s explicit and clear elaboration on a possible quantitative easing program. EURUSD was initially trading higher, rising from 1.3760 to 1.3805 as markets anticipated another Draghi “asleep at the wheel” moment. The Euro fell from the highs near 1.3800 as market participants realized there were dovish adjustments to the Governing Council’s statement.

April Statement, Changes in Bold:

Looking ahead, we will monitor developments very closely and will consider all instruments available to us. We are resolute in our determination to maintain a high degree of monetary accommodation and to act swiftly if required. Hence, we do not exclude further monetary policy easing and we firmly reiterate that we continue to expect the key ECB interest rates to remain at present or lower levels for an extended period of time. This expectation is based on an overall subdued outlook for inflation extending into the medium term, given the broad-based weakness of the economy, the high degree of unutilised capacity and subdued money and credit creation. At the same time, we are closely following developments on money markets. The Governing Council is unanimous in its commitment to using also unconventional instruments within its mandate in order to cope effectively with risks of a too prolonged period of low inflation.

This line was also added:


the possible repercussions of both geopolitical risks and exchange rate developments will be monitored closely.


Journalists in the audience pounced on these changes as nearly every question during the  Q&A revolved around the implementation of a QE program. Draghi was surprisingly open about details regarding an unconventional easing program, saying that there was a discussion of QE this month as opposed to last month when there was none. He said that QE would be an ongoing discussion in the coming meetings. The governing council’s focus is on the Eurozone’s weak bank lending channel, so QE is likely to take the form of buying private bank loans as Mario Draghi alluded to during the Davos conference:

http://www.ft.com/intl/cms/s/0/6646e826-86ab-11e3-aa31-00144feab7de.html

Negative rates and discontinuing SMP sterilization remain on the table as viable options, but it seems that the majority of the focus is now on an impending QE program. Notably absent was Draghi’s recent ‘head in the sand’ boasts of the Euro area being an “island of stability”, oblivious rejections of deflationary threats and cherry picking of recent positive data. There was a very clear shift in rhetoric towards a dovish tone and the EURUSD took note falling from highs of around 1.3805 to a low of 1.3710 thus far by 9:45am EST.

This is the first time that Draghi has extensively and explicitly discussed a quantitative easing program during an ECB press conference. The changes to the opening statement about unanimity on unconventional action was a vague way of saying Jens Weidmann and the Bundesbank do not oppose taking action. The governing council clearly wants to accomplish more than just getting the EUR exchange rate down, they want to ease policy to increase bank lending in the Euro Area. It would seem most sensible to initiate such a program once the bank stress test report is completed in October, obviously action will be priced into FX markets long before then.