The ECB will take center stage today as Mario Draghi and the ECB’s governing council members take the stage in what could potentially tilt the scales in either direction. The markets are clearly anticipating the announcement of QE, with the possibility of it starting in March 2015. We break down the essential components of what to look out for in today’s policy announcement.
QE Size and Scope
In the run up to the European Central Bank event, the markets have been flooded with an abundance of rumors floating around on the scope and size of the ECB’s QE programs. However, sifting through the noise, it is evident that the markets want to see nothing less than €500 billion in the size of the program. There has been a lot of talk also going around on how the ECB plans to implement QE. A major opponent to the view is that the ECB cannot legally buy sovereign bonds from the Eurozone countries, which clearly Germany has a very strong opposing view about. This would lead to the ECB rather engaging in QE by involving the regional Central Banks, so as to contain the risks to each region without overbearing the tax payers in other Eurozone countries.
However, be prepared for announcements that do not specifically put a target on the purchases but rather a broad approach. Meaning that the ECB could as well look to purchase bonds on a monthly basis; being flexible yet targeting the €1 trillion balance sheet last seen in 2012.
Although largely ignored, it would be prudent to take notice of the conventional monetary policy tools as well as such as the ECB’s interest rates and rates on deposits held with the Central Bank. While in the past, the ECB has ruled out that it has no more room to go below the 0.05% interest rate right now, there could be room for the ECB to further slash its interest rates on deposits from current -0.20% levels in a bid to ensure that banks start to lend to the economy.
Mind the volatility
If yesterday evening’s market volatility was anything to go by, today’s event could set off fireworks. Late into the US trading session, Bloomberg published a “leaked” new piece which showed that the ECB would engage in purchasing €50 billion in sovereign bonds starting March 2015 and would continue to purchase at the said levels into 2016. While the stock markets reacted bullishly to the news, the EURUSD also gained on the rumors, rising as much as 0.8%. Gold, however reacted differently as it eased from its current levels of $1300, falling to $1290, clearly showing a bit of a disappointment on the news.
Regardless of the rumors that have been floating since the past few weeks, today’s ECB is definitely going to bring a lot of volatility to the markets. Another factor to consider is the Swiss National Bank, which continues to be active via currency interventions.
While it would hard to pinpoint the market moves tomorrow, traders should bear in mind that there is a considerably gap between the policy announcement and the press conference, which could result in some wild choppy price action.
For the risk averse traders, tomorrow might be a perfect day to take time off from their trading terminals, while we wish the active traders a very good luck!