Less dovish than expected can some of the ECB Dec pol decision. As expected, the bank announced
that PEPP will discontinue from March 2022, but they announced a surprise decline monthly
purchases under the APP, which will see purchases increased to EUR 40bln from EUR 20bln
from2Q22 and then subsequently lowered to EUR 30bln in Q3 and down to EUR 20bln in 4Q22.
Markets were not expecting any reduced purchases under the PEPP, so expecting the APP amount
to return to EUR 20 billion by end next year was less dovish than expected. On inflation there was
no surprises with updated staff econ projections showed 2023 HICP at 1.8% which reiterated the
bank’s view that inflation will return to below target in the med-term. President Lagarde struck a
familiar tone regarding rates by reaffirming that rates are unlikely to rise next year. As usually ECB
sources provided more colour after the meeting by showing further disagreements among the GC
regarding with the hawks unhappy with extending PEPP reinvestments to 2024 and not setting an
end-date to the APP, and of course disagreed that inflation risks as skewed higher. Overall, the bank
was less dovish than expected but the stark policy divergence between the ECB and the likes of the
Fed and BoE means the bias for the EUR remains tilted lower in the med-term.
As a high-beta currency, the NZD benefited from the market's improving risk outlook coming out of
the pandemic as participants moved out of safe-havens. As a pro-cyclical currency, the CAD enjoyed
upside alongside other cyclical assets supported by reflation and post-recession recovery best. If
expectations for the global economy remains positive the overall positive outlook for risk sentiment
should be supportive for the NZD in the med-term, but recent short-term jitters are a timely
reminder that risk sentiment is also a very important short-term driver
that PEPP will discontinue from March 2022, but they announced a surprise decline monthly
purchases under the APP, which will see purchases increased to EUR 40bln from EUR 20bln
from2Q22 and then subsequently lowered to EUR 30bln in Q3 and down to EUR 20bln in 4Q22.
Markets were not expecting any reduced purchases under the PEPP, so expecting the APP amount
to return to EUR 20 billion by end next year was less dovish than expected. On inflation there was
no surprises with updated staff econ projections showed 2023 HICP at 1.8% which reiterated the
bank’s view that inflation will return to below target in the med-term. President Lagarde struck a
familiar tone regarding rates by reaffirming that rates are unlikely to rise next year. As usually ECB
sources provided more colour after the meeting by showing further disagreements among the GC
regarding with the hawks unhappy with extending PEPP reinvestments to 2024 and not setting an
end-date to the APP, and of course disagreed that inflation risks as skewed higher. Overall, the bank
was less dovish than expected but the stark policy divergence between the ECB and the likes of the
Fed and BoE means the bias for the EUR remains tilted lower in the med-term.
As a high-beta currency, the NZD benefited from the market's improving risk outlook coming out of
the pandemic as participants moved out of safe-havens. As a pro-cyclical currency, the CAD enjoyed
upside alongside other cyclical assets supported by reflation and post-recession recovery best. If
expectations for the global economy remains positive the overall positive outlook for risk sentiment
should be supportive for the NZD in the med-term, but recent short-term jitters are a timely
reminder that risk sentiment is also a very important short-term driver