In case youre living under a rock, you should know that the euro took serious hits yesterday despite the lack of policy changes from the ECB. Whats up with that?! Here are four things you need to know:
No policy changes in October
As expected, the European Central Bank (ECB) didnt make any changes to its monetary policies:
- The rate on the main refinancing operations is kept at 0.00%
- Interest rates on marginal lending facility is still 0.25%
- Deposit facility rate remains at -0.40% and
- Monthly asset purchases is kept at 80 billion and is expected to run until the end of March 2017 or beyond if necessary.
More easing vs. tapering
As we discussed earlier this month, major central banks like the BOJ and ECB are running out of runway to boost consumer prices. In a nutshell, they need to taper their asset purchases so they dont create asset bubbles or run out of government bonds to buy, but they have to do it so that market players understand that tapering does not mean tightening.
Remember that the ECBs balance sheet has already ballooned to a record high of 3.5 trillion after repeatedly extending its stimulus programs. Despite that, the euro zones inflation continues to stay well below the ECBs target of just under 2.0%. And with the ECBs QE program ending in five months, market players expected hints on whether or not the central bank will extend its asset purchases or begin to taper their purchases.
Instead of outlining plans though, Draghi shared that he and his team have only discussed possible changes to QE but wouldnt share which options were favored.
Apparently, they have NOT discussed extending the QE program beyond March, lowering interest rates, or tapering their purchases anytime soon. Draghi even discounted earlier rumors of possible tapering, saying that the source was unauthorized and uninformed.
All will be revealed in December
Looks like Decembers meeting will be a live one! ECB members might not have discussed much this month, but they might have a more serious huddle in December. Draghi announced that:
In December the Governing Councils assessment will benefit from the new staff macroeconomic projections extending through 2019 and from the work of the Eurosystem committees on the options to ensure the smooth implementation of our purchase programme until March 2017 or beyond if necessary.
EUR traders dont like ambiguous statements
Draghis pussyfooting around the ECBs plans didnt do the euro any favors. The combo of more easing down the road, lack of hints on tapering, and the uncertainty of their plans ahead of the March 2017 deadline only made euro traders more nervous.
The euros price action was quiet even after the ECBs official statement was released, then shot up when Draghi said that stimulus measures wont last forever. However, it soon fell across the board as soon as Draghi seemed to favor more easing anyway.
EUR/USD rocketed to 1.1040 before closing 42 pips (-0.38%) lower than its open price while EUR/JPY closed 95 pips lower than its intraday high. Meanwhile, EUR/GBP closed at .8921 after hitting a high of .9026.
Right now we know two things from what Draghi has shared. First, the ECB is nowhere done stimulating the economy. Though he hinted that the economy is slowly but steadily recovering, he also warned that there no signs yet that inflation is picking up at a sustainable rate. Not only that, but the ECB also doesnt see any bubbles yet, and that they dont think the QE program will run out of bonds to buy anytime soon.
Next, we know that if the ECB does taper, it wont do so in an abrupt manner. Though Draghi hinted that QE cant run forever, he also shared that an abrupt ending to bond purchases, I think, is unlikely; adding that a sudden stop is not present in anybodys mind.
What do you think? Will the ECB add more stimulus or start to taper in December?