Today we learn of the participation of the second opportunity to borrow funds from the ECB under the Targeted Long-Term Repo facility. Recall that this year’s access was limited to 7% of a bank’s loan book (loans to households and businesses excluding mortgages). Next year’s access is somewhat linked to growth of that loan book.
The European Central Bank may begin a U.S. style quantitative easing program as early as January 2015.
In a press conference, ECB President Mario Draghi said that a bond-buying program would help stimulate growth in the European Union while also keeping the Eurozone from a deflationary trap. “I am convinced that a quantitative easing program, which could include sovereign bonds, falls within our mandate,” he said, adding that price stability remains the ECB’s “main objective.”
The ECB meeting or more precisely, the press conference, is the main event of the day, and possibly of the week and month. ECB President Draghi and Vice President Constancio have expressed heightened urgency to boost inflation as fast as possible. This has been countered by others arguing to give other new initiatives, including the second TLTRO (next week) a chance to work. Moreover, Bundesbank’s Weidmann has argued that the drop in oil prices will also provide stimulus that had not been counted on previously.
The US dollar is extending its advance as the divergence theme moves into overdrive. The dollar has drawn close to JPY119.50. The euro has fallen to new lows near $1.2320, turning back from $1.25 on Monday. The Australian dollar briefly fell below $0.8390.
The main exception is sterling, which is holding its own after a stronger than expected service PMI. Although it slipped below yesterday’s low, Monday’s low near $1.5585 remains intact, and sterling is trading around 3/4 a cent above there near midday in London.
Megan Trainor tells us it is “All About the Base”. It seems like many reporters and analysts may be mistaking her lyrics as it is all about debase, as in currency wars.
The latest surge of currency war stories follow the unexpected decision by the Bank of Japan to dramatically increase its Qualitative and Quantitative Easing at the end of October. It was the same week that the Federal Reserve announced the end of its asset purchase operations. Since the BOJ’s decision, the yen has depreciated by 8.3%.
After yielding ground yesterday, the US dollar comes back bid today. The main driver is the divergence that favors the US. Specifically, yesterday two people we have identified as part of the troika at the Federal Reserve, from where policy signals emanate, played down the disinflationary threat of the fall in oil, saying it would likely be temporary.
As disinflation and deflation threatens growth rates in emerging markets and the European Union, central banks have hinted that their monetary policy will become more accommodative in the coming months.
From China to the European Central Bank, policymakers are cutting growth rates and mulling lowering interest rates and expanding monetary bases in an attempt to get credit to flow more freely around the world.
Contrary to the leaks, ECB President Draghi stuck to his intent that the ECB’s balance sheet move back toward the 2012 levels. He clearly confirmed that this was unanimous. This was the first time, such a reference was made in the introductory remarks, which gives it more gravitas.
The dollar is mixed on the day, but moves have been modest ahead of the ECB meeting. The Euro recovered to trade just above the $1.25 area and sterling is hovering just around $1.5950. The Australian and New Zealand dollars are outperforming at $0.8610 and $0.7740, respectively.
The US Federal Reserve this week has moved one step closer to lifting interest rates by ending its controversial bond-buying program. This begins a long-anticipated process that will take many months to complete: the metamorphosis of a dove into a hawk.
This leaves us with the question of a date for an actual rate hike – a moment economists expect surveyed by CNBC expect will be in July 2015, a month later than previously forecast.
