ECB, ready to purchase asset-backed securities next week

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ECB

In a day marked by low volatility, the lone voice was that of ECB executive board member, Yves Mersch’s speech in Herrenberg, Germany. Mersch said that the ECB’s policy makers are ready to purchase asset-backed securities (or ABS for short) next week as part of the European Central Bank’s stimulus plan in an effort to raise its balance sheet and inject liquidity into the markets.

The ECB had on many occasions hinted that it would continue to expand its balance sheet to the pre-2012 crisis levels, amounting close to 1 trillion Euros as well as including potentially dipping into purchasing sovereign government bonds, something which remains a hotly debated issue in the single currency bloc. While last week there were rumors of insider information about a rift within the ECB’s policy making body, Mario Draghi made it very clear during ECB’s press conference early last week that the policy making body remains united and unanimous in its decision to continue its stimulus program.

The ECB has included a series of measures including purchasing covered bonds and corporate debt few weeks ago. Mersch also noted that “the ECB is not yet decided to buy government bonds” in what is being seen as a wait and watch mode to gauge the response to the ECB’s second tranche of TLTRO due in December this year.

So far, the amount of covered bonds that were settled under the ECB’s program increased by 2.629 billion Euros or approximately $3.27 billion last week to a total outstanding of 7.4 billion Euros so far. With the announcement of the purchases of asset-backed securities, the ECB will now slow down its purchases of covered bonds.

On Friday, the Eurozone will release its quarterly CPI and GDP figures. While core CPI in the Eurozone has been mostly stable within the 0.7% range, it is well below the ECB’s target inflation. At the same time, although the CPI shows signs of stabilizing, it is dangerously close to flip towards deflation, a threat that ECB is well aware of and wants to avoid at all costs. GDP for the single currency bloc has also been stagnant barely rising 0.1% on a quarterly basis. Germany, which has so far managed to post growth, has also started showing signs of weakness, with the next key release coming out on the 13th of November, which will reveal the monthly inflation data which is expected to post declines.

The Euro single currency has been quite resilient despite trading in a larger bearish trend. While the pair virtually did not react much as ECB left its policy unchanged, the Euro declined considerably as Draghi reiterated that the ECB was ready to act if need be. However, with a mixed NFP data EURUSD managed to regain most of its losses the previous day.

With the US markets closed today on account of Veteran’s day, EURUSD is likely to drift along as economic data starts pouring in with the US retail sales data followed by the GDP and CPI releases from the Eurozone and Germany later in the week.

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