EUR USD (1.2780) Better-than-expected data from China and Germany and successful eurozone bond auctions spurred risk appetite across asset classes yesterday – equity markets are strong and the euro is firming. In this relatively benign investment environment, some press reports are now dwelling on the rethink going in the ECB. WSJ reports an interview with Governing Council member Nowotny in which he suggested that ECB is looking for possible alternatives to its controversial SMP programme. Admittedly critics have panned SMP for eroding central bank independence and for risking an inflation spiral. But does the recent investor appetite for the eurozone short-dated paper in any way lend itself to a scenario where markets can afford the ECB exiting SMP? A Financial Times Deutschland report seems to imply that the discussions in the ECB have a wider spectrum – dwelling on scope for buying other kinds of assets or for pursuing Fed style QE. Given that the new ECB president has tried to avoid any public misconceptions about the Bank’s choice of sovereign bonds to buy, the inclusion of other kind of assets in the shopping agenda is hardly likely to ease this dilemma. Only the purchase of eurobonds would remove any risk of the ECB decisions being misconstrued.
Click here to read the full report: Daily forex 011812
Deutsche Bank
Fixed Income Research – Global