Draghi’s Deliverance
Three policy decisions are due today but we expect the market to express interest in only one central banker. ECB President Mario Draghi’s intentions today appear to have been well flagged already by a series of leaks and passive acknowledgements by other government officials. The official verdict is due, but so far the known details have appeared to have satisfied the basic demands of markets. Sterilised purchases may go some way to placate German lawmakers fearing monetization and inflation issues, while dropping seniority status might also encourage the private sector to participate as well. How much buy-in the Bundesbank and more hawkish German official wish to provide is an open question, while waiting for the relevant recipients of the programme to officially request assistance will also test the Eurozone’s resolve in the coming weeks as the details become clear. Nonetheless, with the euro trading up to 1.26 and positioning still quite favourable for another squeeze higher, the pressure is on Draghi to follow up, but we advise against expecting the unacceptable, insofar as policy, legal and political constraints provide. As noted in our latest FX Comment (“Trading Draghi”), the ECB meeting ahead today might initially be viewed as a disappointment, since it may be slightly early for the presentation of the finer details and modalities of the bond buying programme. In addition, we need to be cognizant of the other decisions in play. A 25bp cut in the main refinancing rate is expected, though the verdict is out on whether the deposit rate will also be adjusted. Even after the ECB exhausts its options bar full-blown unsterilized bond purchases, it is not the central bank’s job to address the finer details of structural reform within the Eurozone and it won’t take long before that factor sets in. The BoE and the Riksbank also have their monetary policy meetings ahead today. The BoE is likely to keep its policy rate and asset purchase target unchanged at 0.5% and GBP375 bn respectively. Last month, Governor King noted that further monetary stimulus is more likely to be in the form of additional QE, rather than a rate cut. We expect the BoE to stay on the sidelines until November, when it gets a chance to assess the impact of Funding for Lending Scheme and the current QE programme. Our economists expect the Riksbank to keep its rate unchanged at 1.5%. But given the soft data in recent weeks and a currency that has appreciated considerably, risks are increasing that the Riksbank strikes a more dovish stance – to the detriment of SEK. Overnight Australia reported a mixed unemployment report: 8.8k jobs were lost but largely due to declines in part-time employment. The unemployment rate fell to 5.1% as the participation rate declined. Most bourses are still trading in positive territory in Asia, EURUSD traded 1.2594-1.2620 and USDJPY 78.38-78.47.
Click here to read the full report: UBS Morning Adviser Europe
UBS Investment Bank