ECB: All roads headed towards the central bank today - BBH

In view of analysts at BBH, it is all about the ECB meeting today as the market was hoping for more details last month, but Draghi pointed to today.  

Key Quotes

“The broad issue is well known.  While growth has been strong, price pressures are still not, according to the ECB, on a durable path toward its "close but lower than 2%" target.  The ECB judges that substantial additional stimulus is needed.”

“It is currently buying 60 bln euros a month in assets, that consist of mostly sovereign bonds, but includes supras, corporates, and asset-backed securities.  At the same time, investors seem to accept that under the current self-imposed rules, which the ECB has modified in the past, there are about 300 bln euros in eligible securities that can be bought by the Eurosystem next year.”

“For the remainder of this year, the ECB is buying 60 bln euro (180 bln euros here in Q4) while the Fed's balance sheet will decrease by $30 bln.  That divergence will continue to widen for the foreseeable future.  There appears to be a consensus that the ECB extends its purchases through the first nine months of 2018 at a pace half the current size.  That would allow the ECB to nearly exhaust its universe of acceptable assets.  During the first three quarters of 2018, the Fed's balance sheet is projected to shrink by $270 bln.”  

“Many observers are not convinced that the asset purchases are doing much good, but they recognize that stopping them would be potentially destabilizing.  The other important element, if not of greater importance, is what the asset purchases say about rising rates.  The ECB has been clear that like the Fed, it will not raise interest rates until after the asset purchases are complete.  The longer the asset purchases, the further out the first rate hike lies.  Last month, the consensus was for a six-month extension.”

“The ECB will likely seek to maintain as much flexibility as possible.  It is unlikely to call this tapering as it implies an endpoint, which the central bank does not want to suggest, even if we all know it is there.  The re-scaling of its operations is meant to adjust for the evolving economic and financial conditions.  Some details about the securities and maybe the composition of the assets it will buy may come in December.  Consistently, and as recently as last month, Draghi played down concerns about the scarcity of assets.”  

“We suspect the short-term market is inclined to buy euros on as expected news.  Despite widening interest rate differentials in the dollar's favor, the euro has been trading in a roughly $1.1720-$1.1880 trading range for more than the past two weeks.  Speculators in the futures market have a substantial gross and net long position.  The euro's gains since Monday's low (~$1.1725) appears to be some shorts who may have tried picking a top, covering ahead of the ECB meeting.”  

“That said, we have not abandoned our expectation that last month's dollar recovery marks the end of the slide that began with the defeat of the National Front in France in late April and concluded in early September.  A break above $1.1880-$1.1910 would call into question what we think is a medium-term bearish technical pattern.  Fundamentally, we think that the divergence meme is still the key driver over the longer term and we argue that the balance sheet and rate divergence have not peaked.  Indeed, the peak is still more than a year away.”