ECB Extends QE But Trims Asset Purchases
Swissquote Bank Ltd | Dec 09, 2016 07:57AM ET
Central banks in focus (by Arnaud Masset)
First the ECB
The US dollar was the big winner yesterday amid the ECB's decision to extend its quantitative easing programme as it surged on a broad basis with the dollar index gaining 1.40% up to 101.20, while the single currency fell 2%. The European central bank announced an extension of its QE by nine months until December 2017 but trimmed the monthly purchase target to €60bn per month from €80bn. In addition, Mario Draghi eased the buying rules, allowing the purchase of bonds yielding below -0.4% -- the current ECB’s deposit rate -- and extending the maturity range for eligible securities. The combination of these measures could signal the beginning of tapering; however we believe the ECB is more concerned about potential liquidity issues, which would explain the lowering of the size of the QE. But to mitigate the negative impact this QE reduction would have had on the market, he announced the two latter measures, preventing a sharp EUR appreciation, and argued that it was mostly due to the fact that deflationary risk had largely disappeared. EUR/USD fell 2% to 1.0610 after the announcement and has been trading trendless around that level since then.
The Fed
The December meeting of the Federal Reserve has been long awaited as it was seen as the only opportunity for an interest rate hike. The Fed has therefore done the job of preparing the market for this move. We believe that the upcoming tightening move is fully priced in, meaning that the Fed could only disappoint should Janet Yellen send some dovish signals at the press conference that follows the rate decision. The “Trump effect” is also slowly fading as market participants realised it will take months, if not years, for the incoming US president to give life to his campaign promises. All in all, we believe that the dollar rally is coming to an end as downside correction is becoming more and more likely. Be ready for dollar weakness as we start 2017.
SNB reaction to ECB meeting (by Yann Quelenn)
The European Central Bank has finally decided to lower its pace of purchases after April to €60 billion and buy bonds with rates below the depo floor of -0.4%. This outcome was essential as bond scarcity is making the pursuit of the QE program increasingly difficult.
Following the ECB rates decision and press conference, the Swiss franc appreciated again and the pair is now back below 1.08. The war on devaluation rages on with upside pressure on the Helvetic currency becoming increasingly difficult to sustain in our view. Swiss total sight deposits have increased sharply over the last month following President-elect Trump’s election, which would suggest a strong intervention from the SNB. Monday’s release of sight deposits should confirm this view.
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Also the SNB’s next meeting is due to be held next Thursday and we believe that there is still some room for further negative interest rates as mentioned by Andreas Maechler some weeks ago: "Loose monetary policy has not reached the limit of its effectiveness. […]. We believe the benefit of the negative interest rate still far outweighs the costs”.
EUR/GBP - Lack Of Follow-Through.
Yann Quelenn
EUR/USD's weakness is back. Hourly resistance is given at 1.0874 (08/12/2016 high). Support can be found at 1.0506 (05/12/2016 low). Bearish pressures seem to increase around 1.0800. Expected to show further weakness around that level. In the longer term, the death cross indicates a further bearish bias despite the pair has increased since last December. Key resistance holds at 1.1714 (24/08/2015 high). Strong support given at 1.0458 (16/03/2015 low) is on target.
GBP/USD is bouncing back from hourly resistance at 1.2771 (05/10/2016 high). Hourly support is given at 1.2302 (18/11/2016 low). Expected to show renewed pressures towards resistance at 1.2771. The long-term technical pattern is even more negative since the Brexit vote has paved the way for further decline. Long-term support given at 1.0520 (01/03/85) represents a decent target. Long-term resistance is given at 1.5018 (24/06/2015) and would indicate a long-term reversal in the negative trend. Yet, it is very unlikely at the moment.
USD/JPY is trading sideways. The pair is monitoring resistance given at 114.83 (16/02/2016 high). Hourly support can be found at 112.88 (05/12/2016 low). Significant support is given around 111.36 (28/11/2016 low). Stronger support lies at 108.56 (17/11/2016 low). Expected to see renewed short-term bullish pressures. We favor a long-term bearish bias. Support is now given at 96.57 (10/08/2013 low). A gradual rise towards the major resistance at 135.15 (01/02/2002 high) seems absolutely unlikely. Expected to decline further support at 93.79 (13/06/2013 low).
USD/CHF is trading mixed. Key support is given at the parity. Hourly resistance lies at 1.0205 (30/11/2016 high). The road is wide-open for renewed weakness. In the long-term, the pair is still trading in range since 2011 despite some turmoil when the SNB unpegged the CHF. Key support can be found 0.8986 (30/01/2015 low). The technical structure favours nonetheless a long term bullish bias since the unpeg in January 2015.
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