ECB to err on the dovish side - Nomura

The ECB is widely expected to announce that the monthly pace of asset purchases will be reduced from the beginning of next year, according to analysts at Nomura.

Key Quotes

“As far as the parameters of the APP are concerned, in our base case we expect monthly purchases to be cut by EUR20bn to EUR40bn per month from January to June 2018. We further expect the forward guidance on interest rates and the APP to remain unchanged.”

“However, the bigger issue here is whether the ECB keeps the programme open-ended or sends a firm signal about ending it. And with no change expected in the forward guidance we are in the former – and thus the more dovish – camp. Preventing a sharp market response that would tighten financial conditions and potentially destabilise economic activity is clearly a key priority for the ECB at present in its wish to see firmer inflation data in the period ahead.” 

“We do not share the ECB’s discomfort on that matter. Euro area fundamentals do not, in our view, really warrant the current and prospective degree of ECB accommodation. Policy rates may shift up a little sooner than the market is discounting and specifically on our forecasts in Q4 2018.”

“Rates: It is in the context of forward guidance being a key policy tool for the ECB that we should judge next week’s ECB policy decision. We would view a decrease in the monthly purchase rate as hawkish or dovish to the extent that it relates to a long time extension of the APP. The market is pricing the first 10bp hike for end-April 2019. Working backwards, this implies the market expects about a 10-month extension. If the ECB announces either a longer extension, or an amount implying an extension much beyond 10 months, the market will likely take it dovishly. We maintain our EUR5s30s swap spread box (tighter 30yr swap spreads) and EUR6m2y receivers. We also like forwardstarting curve steepeners. We have less conviction in our short Bund position as we entered the trade in May; negative carry since then takes us closer to our stop.”

“FX: If the ECB announces just a six-month extension as we expect, the outcome would be viewed as slightly hawkish. We are seeing increased EUR sensitivity to rate spread and data surprises, which should continue under the six-month extension scenario, supporting EUR. In the medium term, ECB policy normalisation is clearly backed by the strong economic fundamentals, and we see EUR outperformance continuing into 2018.”