The ECB is keeping QE for winter. Fundamental analysis for 05.09.2014
05.09.2014
The outcome of yesterday's meeting of the ECB has been one of the most surprising in the history of the monetary union. Lowering the key rate to 0.05% was not expected by anybody. It is likely that the slowdown in inflation to 0.3% in August after all was the critical level for the ECB, the achievement of which was the starting point for more action from the regulator to stabilize the continuously declining inflation.
Much more interesting was the announcement of the beginning of ABS buying. But do not confuse this program with full-fledged quantitative easing. As part of the ABS, the launch of which will take place in October, the regulator will only buy the assets of the private sector. Accordingly, the size of the program will be limited to a few hundred billion euro, which is clearly not a full QE, given the scale of the euro zone.
Speaking more specifically, the ECB will buy securities issued by European banks on loans granted to individuals or companies. It is expected that through this mechanism, the banks will be able to package the loans and sell them to the ECB, which in turn can provide the momentum for a return to growth in lending (for more than two years, there was a reduction in the volume of loans).
There is another nuance. In case of aggravation of the crisis and massive loan defaults, the losses will be borne by taxpayers. In order to reduce these risks, the ECB will buy the simplest version of ABS, avoiding the complex structured securities. However, there are legitimate concerns that these measures to curb inflation will still be inadequate and without the full QE it still wouldn’t work.
In Draghi’s logic, the success of the measures taken yesterday will depend on the policies of national governments, because only when there is reduction in the tax burden and an increase in investment spending, there can be talk about the beginning of any meaningful progress. Otherwise, the ECB still have to change from purchases of private debt to the bonds of European countries - it can happen before the end of the year.
However, here history can play cruel joke on Draghi. In the midst of the debt crisis, when interest rates on Eurobonds grew by leaps and bounds, Draghi regularly pointed to the fact that it’s not included in his mandate. Now in the European capitals it can be said with conviction that the struggle with low inflation is the problem of the ECB, and it is spelled out in its mandate, and we're struggling with deficits and now is not the time to reduce taxes.
Maintaining the strategies for transactions on sale is fully justified, and I opened an additional trade on the correction. Against the possible positive labour market United States, the pair may continue to decline as the better the data, the higher is the likelihood of a Fed rate hike, and the further the dispersal of vectors of the American and European regulators.
RoboForex Analytical Department
Much more interesting was the announcement of the beginning of ABS buying. But do not confuse this program with full-fledged quantitative easing. As part of the ABS, the launch of which will take place in October, the regulator will only buy the assets of the private sector. Accordingly, the size of the program will be limited to a few hundred billion euro, which is clearly not a full QE, given the scale of the euro zone.
Speaking more specifically, the ECB will buy securities issued by European banks on loans granted to individuals or companies. It is expected that through this mechanism, the banks will be able to package the loans and sell them to the ECB, which in turn can provide the momentum for a return to growth in lending (for more than two years, there was a reduction in the volume of loans).
There is another nuance. In case of aggravation of the crisis and massive loan defaults, the losses will be borne by taxpayers. In order to reduce these risks, the ECB will buy the simplest version of ABS, avoiding the complex structured securities. However, there are legitimate concerns that these measures to curb inflation will still be inadequate and without the full QE it still wouldn’t work.
In Draghi’s logic, the success of the measures taken yesterday will depend on the policies of national governments, because only when there is reduction in the tax burden and an increase in investment spending, there can be talk about the beginning of any meaningful progress. Otherwise, the ECB still have to change from purchases of private debt to the bonds of European countries - it can happen before the end of the year.
However, here history can play cruel joke on Draghi. In the midst of the debt crisis, when interest rates on Eurobonds grew by leaps and bounds, Draghi regularly pointed to the fact that it’s not included in his mandate. Now in the European capitals it can be said with conviction that the struggle with low inflation is the problem of the ECB, and it is spelled out in its mandate, and we're struggling with deficits and now is not the time to reduce taxes.
Maintaining the strategies for transactions on sale is fully justified, and I opened an additional trade on the correction. Against the possible positive labour market United States, the pair may continue to decline as the better the data, the higher is the likelihood of a Fed rate hike, and the further the dispersal of vectors of the American and European regulators.
RoboForex Analytical Department
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Forecasts presented in this section only reflect the author’s private opinion and should not be considered as guidance for trading. RoboForex bears no responsibility for trading results based on trading recommendations described in these analytical reviews.