Arguably the biggest news event this week will be the ECB press conference Thursday 14:30 CET. Officially its just a periodic meeting where they convene to vote on their benchmark interest rate. But in reality, they will discuss the purchase of government bonds and all eyes will be on the press conference after the rate announcement, as the market expects Draghi to provide more details on the highly anticipated quantitative easing program (QE).
With the CHF cap removed, a large buyer of the Euro (namely the SNB) has suddenly left the market, leading to speculations whether they know something about the size of the ECB plans that made them decide to instantly stop buying. It has been reported that Draghi already met with Angela Merkel and her finance minister to outline the plans and Monday French President François Hollande stated the ECB will decide to buy government debt later this week. Add to that a favourable ruling by the European Courts of Justice and the surprise decision by the Danish central bank on Monday to cut its deposit rate (after interventions in the market proved insufficient). I have said it before and I will say it again: those who believe QE is not going to happen, do so at their own risk.
Although the size of the government bond buying is not yet known, it is expected to be large-scale, large enough to have a chance at driving the inflation in the Eurozone from the current negative territory towards the required 2.0%. Should indeed a full scale QE be announced (there is talk of as much as EUR 1 trl of bond purchases over two years), I believe the EU pair will dump and immediately start a further descent. In terms of predictions how much EU can fall with a full QE, I have read anything from 115, to 110, to 105 to even parity over time. However, if a smaller than expected QE would be announced (<= EUR 500bn), the pair might start a relief rally.
If this happens, it would not change my fundamental belief in the bearishness of EU, given the fact that the two central banks (ECB and FeD) would still have divergent policies keeping this pair under selling pressure long term, eventually grinding the price down further. In that situation, one of these central banks would have announced the printing of large amounts of money while the other has plans for a mid-year interest-rate increase. So regardless of the exact size of a QE: I was, am and remain bearish on the fundamental direction of EU, although obviously with a full blown QE the price will grind down faster and reach lower levels than with a lighter form of QE.
Resuming: I am looking forward to the ECB press conference on Thursday, I expect them to announce QE and therefore have a bearish outlook on EU.
-Aggressive traders, expecting a full blown QE (>= EUR 1 trl), can position themselves beforehand for a news trade with a directional bias in the anticipation the announcement will make the pair drop immediately.
-Conservative traders, expecting a lighter form of QE (<= EUR 500bn), can first wait for the news event itself to happen and then sell any rallies that might occur afterwards to get in on the bearish trend at a good price.
UPDATE: ECB did announce an expanded asset purchase programme, for a monthly amount of €60 billion. The programme will start March 2015 and last until September 2016, aiming to achieve inflation rates of 2.0%. As this full-blown QE was larger than expected, the EU pair dumped immediately (as I predicted would happen in that scenario) and is currently down 200 pips compared to when the press conference started. The 115, 114, 113, 112, 111, 109 and 108 handles have been broken and the pair is making new lows.
With the CHF cap removed, a large buyer of the Euro (namely the SNB) has suddenly left the market, leading to speculations whether they know something about the size of the ECB plans that made them decide to instantly stop buying. It has been reported that Draghi already met with Angela Merkel and her finance minister to outline the plans and Monday French President François Hollande stated the ECB will decide to buy government debt later this week. Add to that a favourable ruling by the European Courts of Justice and the surprise decision by the Danish central bank on Monday to cut its deposit rate (after interventions in the market proved insufficient). I have said it before and I will say it again: those who believe QE is not going to happen, do so at their own risk.
Although the size of the government bond buying is not yet known, it is expected to be large-scale, large enough to have a chance at driving the inflation in the Eurozone from the current negative territory towards the required 2.0%. Should indeed a full scale QE be announced (there is talk of as much as EUR 1 trl of bond purchases over two years), I believe the EU pair will dump and immediately start a further descent. In terms of predictions how much EU can fall with a full QE, I have read anything from 115, to 110, to 105 to even parity over time. However, if a smaller than expected QE would be announced (<= EUR 500bn), the pair might start a relief rally.
If this happens, it would not change my fundamental belief in the bearishness of EU, given the fact that the two central banks (ECB and FeD) would still have divergent policies keeping this pair under selling pressure long term, eventually grinding the price down further. In that situation, one of these central banks would have announced the printing of large amounts of money while the other has plans for a mid-year interest-rate increase. So regardless of the exact size of a QE: I was, am and remain bearish on the fundamental direction of EU, although obviously with a full blown QE the price will grind down faster and reach lower levels than with a lighter form of QE.
Resuming: I am looking forward to the ECB press conference on Thursday, I expect them to announce QE and therefore have a bearish outlook on EU.
-Aggressive traders, expecting a full blown QE (>= EUR 1 trl), can position themselves beforehand for a news trade with a directional bias in the anticipation the announcement will make the pair drop immediately.
-Conservative traders, expecting a lighter form of QE (<= EUR 500bn), can first wait for the news event itself to happen and then sell any rallies that might occur afterwards to get in on the bearish trend at a good price.
UPDATE: ECB did announce an expanded asset purchase programme, for a monthly amount of €60 billion. The programme will start March 2015 and last until September 2016, aiming to achieve inflation rates of 2.0%. As this full-blown QE was larger than expected, the EU pair dumped immediately (as I predicted would happen in that scenario) and is currently down 200 pips compared to when the press conference started. The 115, 114, 113, 112, 111, 109 and 108 handles have been broken and the pair is making new lows.
You don´t need to be a weatherman to know which way the wind blows - B. Dylan