ECB Moment Of Truth: Bonds And The EUR/USD
eFXnews | Jan 21, 2015 02:18PM ET
Bank of America (NYSE:BAC) Merrill Lynch expects the ECB to announce at its meeting tomorrow government bond buying (without adding corporate bonds) of between €500 and €700bn over 18 months.
Better late than never:
"We expect QE to include all investment grade government bonds, with a monthly or quarterly pace for the purchases. We also expect a generic description of the purchase distribution across constituencies, which we believe will be a combination of capital key and bond market size. Our baseline is that the program will be mutualized (but with a low level of confidence) and that the ECB would retain considerable discretion on the details of the purchases," BofA projects.
"The crucial issue though, in our view, is not on the technicalities of QE, but whether or not the ECB will manage to create an “open-ended” feel to its program. We believe the ECB will do it by distancing itself from the “intermediate target” – the size of the balance sheet – to shift the attention to its inflation target. A key issue for us is whether this “open-ended feel” could be created in the prepared statement – this would be powerful – or, as we expect is more likely, only in the Q&A," BofA argues.
EUR/USD further weakness needs large, or open-ended QE:
"Our view is that the extent to which the ECB will surprise markets depends on size (well above market expectation of €500bn) and the extent to which markets will perceive QE as being open-ended. ECB communication will be the key. The more Draghi sounds like Haruhiko Kuroda, even though we do not expect the ECB to go as far as the BoJ, the more negative the impact of QE on the Euro will be. If any such language makes it to the official statement even better, but we do not expect it," BofA projects.
"Beyond this ECB meeting, we expect EUR/USD to weaken below current levels only if the divergence of FED and ECB monetary policies is faster than markets expect. Otherwise, we see a choppy EUR/USD path and will be selling the rallies," BofA adds.
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