Credit Suisse: Mixed Signal, EUR/USD Rallies Post-Meeting A Long-Term Sell.
Our European economists expect the ECB to deliver new easing measures, but also see a risk that the central bank will simultaneously point to the possibility of tapering asset purchases in 2017. This type of mixed signal is not easy to decipher, and much would depend on how ECB chief Draghi explains decision making. In particular, a poorly-explained move towards tapering would pose a risk of a European "taper tantrum" and a potent EUR surge on the day. Still, if the ECB is seen tapering enough to prompt EURUSD to push above its October lows around 1.0860, the pair will be back in the ranges it traded before the US election, which would likely require a material tightening in at least longer-term US-euro area rate differentials to be justified. Given that our economists doubt that core euro area inflation is likely to push much beyond 1.0% in 2017, this would seem like jumping the gun to us. As such we would see a move into a 1.09-1.12 range as representing a longer-term sell level for EURUSD. On the other hand, if the ECB is sufficiently dovish, EURUSD should resume its underlying downtrend.
Credit Agricole: Limited Room For ECB To Extend Dovish Expectations; EUR/USD A Buy.
The EUR has been broadly range-bound after rebounding from this year’s lows. The main focus should turn to this week’s ECB monetary policy announcement as a currency driver, especially as political uncertainty is unlikely to increase further in the short-term. As reported by “La Republica” yesterday morning Renzi may press for early elections in January/February next year in return for staying in power until then. However, according to President Mattarella early elections are technically not feasible because changes would be needed to the country’s election law. We remain of the view that EUR/USD is a buy. Limited room of the ECB exceeding dovish expectations coupled with speculative short positioning close to multi-week extremes should keep the risk of further position squaring upside intact. This is especially true should the Fed fail to consider a more than anticipated hawkish forward guidance.
Morgan Stanley: Justification For A Mild EUR Weakness Over The Meeting.
We believe the reaction of the EUR over the ECB meeting will ultimately depend on the probability of tapering in the next 12m. In particular, EURUSD will depend on the short end rate differential between EMU and the US. Our more medium term view, beyond this ECB meeting, is that we expect EURUSD to fall based on the rate differential staying wide and broad USD strength. Our economist's assumption is that the ECB will keep rates on hold at this week's meeting but add a 6m extension to its QE purchase programme. Since the ECB will come back with results from its committees on which QE constraints to relax, investors may have to deal with a plethora of information over the press conference, including new macro economic forecasts. Here are some points we will be looking for as FX watchers and the potential impact it would have on the EUR when taking each measure in isolation. We see justification for the EUR to weaken mildly over the ECB meeting.
ANZ: Any EUR/USD Rallies Post-ECB Meeting Are Corrective And A Selling Opportunity
While there is a widespread expectation that the ECB will extend QE past March 2017, there is a debate about what composition this might take. The central case is that the current level of purchases (EUR80bn) will be extended by six months. We know there is resistance at some national central banks to everexpanding QE, so there is talk that purchases could be scaled back (ie GBP60bn per month), but may be extended for longer, or that QE could be reviewed on a quarterly basis depending on how the path of inflation unfolds. The ECB could also alter the mix of assets it buys (greater weight towards corporate bonds), possibly change the rules preventing QE purchases of bonds yielding less than the deposit rate, and tweak guidelines regarding the amount of an issuance that can be bought. For this reason, the FX market is anticipating a potentially volatile market around the ECB meeting. While the current growth environment suggests there may be little need for more stimulus, there is a reasonable argument to be made that current momentum is dependent on maintaining existing monetary stimulus….EUR/USD failed to break below 1.05 following the defeat of the Italian referendum. We view rallies as corrective and selling opportunities.
NAB: Binary outcome for EUR/USD From The ECB.
The ECB meeting Thursday continues to hold out the threat of a taper for when the current QE program ends in March…Our central call remains the ECB will leave this decision until March (possibly January) when the markets backdrop may be less vulnerable, but there is a not insignificant risk the governing council pushed through a taper in all but name, perhaps limiting bond buying to a maximum of EUR80bn per month. That being said and with the USD pulling back, the outcome still looks binary; with EUR/USD rising to 1.10-1.1150 on an ECB taper or back down and testing the post-election low around 1.05 if the ECB extends QE in its current from past March 2017.
Barclays: EUR/USD Risks Are Asymmetric To The Topside; Sell Rallies
We expect the ECB (Thursday) to announce a time extension of its asset purchase programme by six months at the current rate of EUR80bn/month, along with necessary changes to the public sector purchase programme technical parameters to ensure a sufficiently large pool of eligible assets for purchase. This likely sits towards the dovish end of market expectations. Indeed, a Reuters poll found that while most economists expect a six-month time extension at the current pace, 14 of the 54 survey respondents expected tapering this week. Likely technical parameter changes include a removal of the yield floor (currently linked to the deposit rate), a relaxation of the issue share limit for non-CAC bonds and using the substitution option for Germany. A relaxation of the issue and share limit for AAA-rated countries is less likely. We do not expect purchases of bonds beyond 30-year duration, and purchases are unlikely to shift from the capital key rule. While EURUSD is likely to depreciate if our expectations of ECB action are met, large netshort EURUSD positioning and technical support means a less-dovish decision could result in a materially higher EURUSD. Indeed, our leveraged and real money clients still hold a large cumulative net short EURUSD position and technical support levels, in the form of multi-year lows at 1.0458, are not far away. As such, short EURUSD positions prior to the event are not compelling but we would look for opportunities to initiate these following any material appreciation.
TD: EUR In A Very 'Precarious' Position; Upside Risk S/T But Primary Trend Is Lower.
We continue to target the 1.04 level in EURUSD for end-Q4, but a hawkish outcome flags obvious upside risks to this view. A hawkish outcome – even if unintended – has the potential to reverse the downtrend seen in the pair since late September. Amplifying our concerns is the current state of investor positioning. In the latest available data, the leveraged account component of the IMM data maintained a net short of 26.4% of total Open Interest. While this is not the most stretched level ever seen, it is close to points where this investor segment has covered outstanding shorts in the past. As noted previously, however, we are a little more focused on upside risks for this pair – at least for the near term. We continue to believe that the primary trend is lower, and this is only likely to change on a particularly hawkish ECB outcome, but the risks of an impending squeeze on existing shorts looms large in our estimation. We think the 1.0851 level should represent significant resistance to a move higher while 1.0817 is the 38.2% retrace level of the post-US election trading range. At the same time, we note that 1.0909 (50%) and 1.1001 (61.8%) are also key Fibonacci levels of this same range.
BofA Merrill: Room For Disappointment Or/And Profit Taking.
we see risks of weak forward guidance that could disappoint FX markets. Recent headlines point to strong disagreements within the ECB on what to do next. This suggests to us that extending QE again without papering next year could be much more difficult, particularly if this requires relaxation of the capital key. Our economists expect QE extension without tapering this week, but Draghi may not be able to give a strong message on the ECB commitment to QE for next year, making the current QE extension less effective with markets. Markets could test the ECB, as they did with the BoJ early this year. The initial EUR weakness if the ECB extends QE without tapering this time may prove an opportunity to buy, particularly if it triggers profit taking. Our latest positioning analysis suggests that the market is short EUR/USD, although not by as much as a year ago. This position could explain why EUR has not followed the JPY lower during the USD rally last week making it more difficult for the ECB to being the currency further down. Weak ECB forward guidance could squeeze the short EUR position higher.
BTMU: EUR Resilience Unlikely To Persist Regardless Of ECB Outcome.
The need for the ECB to announce an extension in QE beyond March 2017 seems obvious to us. Even though the cyclical picture for the euro-zone economy looks to be improving, more serious problems related to the cohesion of the single market could be brewing. Given the escalated political uncertainty, now doesn’t appear to be the time to signal an end of ECB support that is clearly helping to stabilise financial markets in the euro-zone. We do not expect the resilience of the euro to persist whatever the outcome of the ECB meeting tomorrow.
BNPP: EUR/USD To Struggle To Extend Upside Much Beyond 1.08.
Our economists also note that in light of the ‘no’ vote, the likelihood of the ECB announcing a scaling back of asset purchases is now less likely at their meeting this Thursday, and that a change in forward guidance in order to give some sort of signal to the markets that QE cannot continue indefinitely in the current form is instead more probable. We would expect EUR/USD to struggle to extend upside much beyond 1.08.
——
For Major Bnaks FX Trades views and targets in real-time, sign-up to eFXplus
—-
SocGen: ECB To Announce QE Extension; Major EUR Downside Unlikely This Month.
The big event of the week is Thursday’s ECB meeting when an extension to ECB bond-buying is likely to be announced (but possibly without any direct reference to how much they buy each month, hinting at tapering). All in all, major EUR downside isn’t likely this month, but we do still expect a move to parity between now and the French Presidential elections as voter anti-establishment sentiment erodes confidence.
Goldman Sachs: ECB Meeting Holds 2 Questions For Markets.
For markets, this week's ECB holds two questions. First, will there be a formal taper decision. Second, if there is no formal announcement to this effect (our base case is for a continuation of the bond buying program at an unchanged pace through late 2017), is the backdrop to the Governing Council sufficiently caustic that President Draghi in the press conference essentially signals that a taper will soon be coming. We think markets will treat either outcome with little distinction. EUR/$ would go up, perhaps substantially. As a result, we think markets will put more weight on the tapering signal, rather than any kind of program extension (which is subject to modification anyway). We think this is no time to taper, simply because of the challenging inflation dynamics in the Euro zone, in line with our European economics team's assessment A premature taper, which a decision to this effect at this meeting would certainly be, will only complicate the ECB's task of getting the Euro zone out of lowflation and fundamentally banishing deflation risk.
UOB: ECB To Deliver The Consensus, A Mildly Bullish Effect On EUR/USD.
All eyes are on the ECB meeting today – policy decision at 8.45pm SGT, followed by Draghi’s press conference at 9.30pm SGT. Expectations are already running high for this meeting, with the one-day implied volatility rising to 25.4%, the highest for a ECB meeting since March where Draghi cut rates more broadly than the markets had expected and increased the pace of bond purchases. Tonight, we expect the ECB to deliver the consensus – announcing a six-month extension of its asset-purchases program (APP) past its original due date in Mar 2017 at the current €80 billion run rate, while keeping its key interest rates unchanged. The extension, in our view, is likely to be complemented by a move to improve the supply of eligible bonds, for example, the removal or softening of the yield floor. We do not expect ECB to rush to taper, earliest being some time in 2H17, provided the Eurozone economic recovery continues and inflation (gradually) rises toward the ECB's target of near to 2%. In all, we see a mildly bullish effect on EUR/USD. That said, a move above Mon’s high of 1.0796 would not be surprising although thick option-related offers near 1.0800 (€3.7b of 1.08 strikes expiring today and tomorrow) may pose an initial hurdle.
SEB: ECB To Lean Towards The Dovish Side.
SEB expects: Rates unchanged QE extension by 6m, current pace of QE (EUR 80bn/m) maintained. Remove deposit rate floor to ensure QE implementation. ECB to lean towards the dovish side to avoid provoking a further surge in yields. Q&A session. ECB to confirm downside risks to growth, inflation and of its easing bias Repeat that ECB policy is effective and that the focus is on policy implementation. Deny “ECB taper” rumours, reiterate the ECB has the will, capacity and ability to act. Repeat call for swift implementation of growth-supportive fiscal policies and structural reforms. Potential market reaction: Largely neutral, our expectations are broadly in line with consensus.
RBC: QE Extension And No Tapering In Sight.
The ECB faces a familiar trade-off when it meets later this week. Despite recent rises in the headline rate, the inflation backdrop is still weak and we do not anticipate that the new set of staff forecasts will show a return to the ECB’s inflation target before 2019. Though the euro area’s economic recovery will continue over the forecast horizon, growth remains too weak to push underlying inflation firmly upwards and risks to the outlook, particularly political risks, have intensified since the last meeting in September. Given that backdrop, we expect that the Governing Council will come out in favour of more easing in the form of continuing its QE programme. But a lack of available bonds means that the question of how they will achieve that remains. To extend the QE programme until at least September 2017, we expect that the ECB will water down the deposit rate floor – essentially allowing purchases below the -40bp threshold thereby unfreezing the currently unavailable assets. That should get the ECB towards a September 2017 threshold (depending on assumptions) but not much beyond.
UBS: ECB to extend QE in its current form (€80bn monthly) by six months to Sept'17
According to our base-case scenario, the ECB will announce a six-month extension of QE, from March to September 2017, with ongoing purchases of €80bn per month; such a decision would seem broadly in line with market expectations. While the new staff macroeconomic forecasts for 2017-19 will form an important basis for the decision, we think the members of the ECB Governing Council will have to take an even more comprehensive view, evaluate the broader balance of risks, and ask themselves whether the time is ripe for a reduction in monetary stimulus. In this context, the GC will also have to consider the implications of political events, such as the outcome of the Italian constitutional referendum on 4 December and the sharp rise in global bond yields which has probably led to an (unwelcome) tightening of financial conditions in Europe. We currently expect the ECB to taper after September 2017, perhaps over the course of one year. We do not think ECB policy rates will be cut further, but rate hikes are unlikely before 2019.
UniCredit: ECB To Preserving Monetary Accommodation Via Extending QE Beyond March 2017.
On Thursday, we expect the ECB to announce a six-to-nine-month extension of QE beyond March 2017, at the present pace of EUR 80bn per month. We also think that the central bank will raise the ISIN limit to 50% from 33% and switch to a more flexible definition of deposit-rate floor, applying it to a portfolio of bonds rather than to each individual security….The decision to keep buying assets at the pace of EUR 80bn per month would be mainly intended to preserve the current “very substantial degree” of monetary accommodation, at a time of limited progress towards a “sustained adjustment in the path of inflation consistent with the Governing Council’s inflation aim”. Any other policy option, be it tapering or a one-step reduction in the monthly purchases, would lead to tighter financial conditions, because investors would (correctly) interpret such moves as deviations from the ECB’s reaction function, possibly due to political reasons. As a matter of fact, in the QE framework, it is the pace of monthly purchases that sends the most powerful market signal. Therefore, any reduction in the flow of purchases (say to EUR 60bn) would ultimately represent a net tightening, even if the Governing Council were to try to offset this with a long extension of the program (for example until March 2018).
Danske: Too Early To Expect An Announcement On Ending QE.
We expect the ECB to extend its QE purchases by six months to September 2017 and maintain the EUR80bn monthly purchases. The continuation of the QE programme should follow as inflation – despite the outlook for an increase – is still not on a sustained path towards the 2% target, which the ECB has defined as the condition for ending the purchases. Lately there has been a lot of speculation on QE tapering, but in our view it is too early to expect an announcement about ending QE. Very prominent ECB members including President Draghi have increasingly emphasised the lack of upward pressure on underlying prices, which together with an expected considerable downward revision to the ECB’s core inflation forecast, should convince enough of the ECB members that it is too early to consider an end-of-easing. We expect the ECB to publish an inflation projection which is close to the one from September but not very optimistic on 2019. Especially the core inflation outlook should be lowered, reflecting a lack of upward pressure on wages due to slack in the labour market. For headline inflation, the ECB is likely to project 1.2% in 2017, 1.5% in 2018 and 1.7% in 2019.
ABN AMRO: No Time For Taper; ECB To Extend QE To September 2017.
We expect the ECB to announce an extension of QE at the current pace to September 2017 from March 2017. There has been some speculation that the ECB may either extend at a slower pace (possibly for longer) or possibly extend at the current pace for 6-months, but send some kind of signal that tapering is likely thereafter. One of these options might be attractive from the point of view of generating a wide consensus in the Governing Council. However, it would not make too much sense as markets would focus on the slower pace/future tapering signal rather than the extension. This means the tightening of financial conditions that the ECB would seek to avoid may actually be triggered by such an announcement. For this reason, we expect an extension at the current pace, with the ECB refraining from the t-word. The recent rise in bond yields has helped to increase the eligible universe for ECB purchases. However, the ECB would still need to change the rules of its programme to further increase this universe if it is to make space for an extension of QE. We think the ECB will likely drop the restrictions on not being able to purchase assets below the depo rate and below a 2y maturity. This seems the most straightforward option to us. The Governing Council could also allow more flexibility for substitute purchases, though we expect continued limited deviations from the capital key.
Nordea: ECB To Prolong QE Without Tapering For 6 Months.
We expect the ECB Governing Council to continue to ease monetary policy at its meeting on 8 December and by doing so to distinguish its policy further from the rising US yields. The main emphasis will be on the asset purchase programme (APP) which we expect to be extended by six months until end-September 2017 with the current monthly pace of EUR 80bn. The prolongation of the programme is likely to be coupled with a message of being ready for even further extensions, if necessary. We wouldn’t completely rule out the possibility that the ECB reduces the target amount (and possibly extends by more than six months). However, that move would almost inevitably be interpreted as a tapering signal which we think the Governing Council wants to avoid. The fear of giving such signals is especially strong at this point where the ECB wants to distinguish its monetary policy from the rising rates in the US due to different inflation outlook in the two economic areas. In order to be able to run the programme efficiently, the ECB has to change its technical parameters…. Regarding forward guidance, the ECB will likely stick to the wording that rates are expected “to remain at present or lower levels for an extended period of time, and well past the horizon of our net asset purchases.” However, we do not expect any changes in the central bank interest rates. Further moves deeper to the negative territory would require a real threat of deflation to materialise which is currently not the case.
———
For Major Bnaks FX Trades views and targets in real-time, sign-up to eFXplus
Copyright © 2016 eFXplus™Original Article
