Balance Sheets Matter
ECB Executive Board Member Joerg Asmussen turned the screw on the euro on Tuesday by initially stressing that forward guidance by the ECB goes ‘beyond 12 months’. In addition, he said he would ‘not rule out’ another LTRO. The speedy ‘clarification’ on his comments suggests that the ECB was rather unhappy with the market impact, especially as they are not in the business of talking down currencies. Yet, behind the scenes the central bank may want to take any form of stimulus it can get, and may be bracing the market for more. Asmussen also concluded that markets are ‘not putting too much faith’ in ‘verbal guidance’. If actions indeed speak louder than words, then the next phase in ECB’s policy could be a return to balance sheet dynamics to complement interest rate-based stimulus.
Read the full report: UBS