30 Apr 2014
Draghi should not have been a surprise - Scotiabank
FXStreet (Guatemala) - Camilla Sutton, CFA, CMT, Chief FX Strategist at Scotiabank explained that yesterday’s comments by President Draghi that QE is a policy tool but isn’t imminent should not have been a surprise.
Key Quotes
"After his speech last week the bar for QE has been set relatively high, essentially a worsening in the medium term outlook for inflation."
"Domestic data included softer than expected money supply growth and better than expected consumer confidence; German regional CPI came in essentially as expected and supporting the consensus for national CPI at –0.1%m/m and 1.4%y/y (released today at 8am EST); while Spanish unemployment rose to 25.9% and Italian retail sales were weak (-0.2%m/m) - but markets were content to ignore this, with the government’s 10-year auction at the lowest yield on record at 3.22%."
"QE is not on the table in next week’s ECB decision—The ECB has reiterated many times, including in its most recent monthly bulletin, that the “medium to long-term inflation expectations remain firmly anchored”; even as market expectations for Eurozone inflation have fallen dramatically; for 2014 CPI, markets had expected it to rise 1.5% y/y last September; since then the expectation has fallen to just 0.9% with a similar trend in the outlook for 2015 CPI—see middle chart. In addition, Wednesday’s flash CPI print is expected to rise to 1.0%y/y on core and 0.8%y/y on headline, partially due to the timing of Easter—today’s German CPI will provide some clues here. Accordingly, with inflation appearing to have bottomed in March, expectations firmly anchored (from the ECB’s perspective) and PMIs suggesting a firming economic backdrop, the bar for the announcement of QE is relatively high. However should EUR break above the ytd high of 1.3967, towards 1.40, we expect the ECB to sound increasingly concerned with how this filters into its price stability mandate."
"Last week’s speech by President Draghi was an important one as it laid out the ECB’s framework for policy action. Below is a summary: For the ECB, contingencies for a monetary reaction include: 1) a tightening of monetary policy—from short-term rates, global bond markets or FX, would be met with conventional methods; 2) a further impairment in the transmission of monetary policy, particularly through the bank lending channel, would be tackled with an LTRO or ABS purchase program; and 3) a worsening in the medium-term outlook for inflation would warrant
QE."
"EUR/USD short‐term technicals: bullish—most studies warn of upside risk; with resistance at the April high of 1.3906 followed by the ytd high of 1.3967 (see bottom chart); support lies at the 50-day at 1.3805.
Key Quotes
"After his speech last week the bar for QE has been set relatively high, essentially a worsening in the medium term outlook for inflation."
"Domestic data included softer than expected money supply growth and better than expected consumer confidence; German regional CPI came in essentially as expected and supporting the consensus for national CPI at –0.1%m/m and 1.4%y/y (released today at 8am EST); while Spanish unemployment rose to 25.9% and Italian retail sales were weak (-0.2%m/m) - but markets were content to ignore this, with the government’s 10-year auction at the lowest yield on record at 3.22%."
"QE is not on the table in next week’s ECB decision—The ECB has reiterated many times, including in its most recent monthly bulletin, that the “medium to long-term inflation expectations remain firmly anchored”; even as market expectations for Eurozone inflation have fallen dramatically; for 2014 CPI, markets had expected it to rise 1.5% y/y last September; since then the expectation has fallen to just 0.9% with a similar trend in the outlook for 2015 CPI—see middle chart. In addition, Wednesday’s flash CPI print is expected to rise to 1.0%y/y on core and 0.8%y/y on headline, partially due to the timing of Easter—today’s German CPI will provide some clues here. Accordingly, with inflation appearing to have bottomed in March, expectations firmly anchored (from the ECB’s perspective) and PMIs suggesting a firming economic backdrop, the bar for the announcement of QE is relatively high. However should EUR break above the ytd high of 1.3967, towards 1.40, we expect the ECB to sound increasingly concerned with how this filters into its price stability mandate."
"Last week’s speech by President Draghi was an important one as it laid out the ECB’s framework for policy action. Below is a summary: For the ECB, contingencies for a monetary reaction include: 1) a tightening of monetary policy—from short-term rates, global bond markets or FX, would be met with conventional methods; 2) a further impairment in the transmission of monetary policy, particularly through the bank lending channel, would be tackled with an LTRO or ABS purchase program; and 3) a worsening in the medium-term outlook for inflation would warrant
QE."
"EUR/USD short‐term technicals: bullish—most studies warn of upside risk; with resistance at the April high of 1.3906 followed by the ytd high of 1.3967 (see bottom chart); support lies at the 50-day at 1.3805.