It was another night of ‘deal or no deal’ ahead of the ECB and BoE rate announcement this morning. Price action has been choppy, influenced mostly by a higher than expected Chinese CPI inflation print (+4.5%) and the fear that the Greek coalition talks were to end in no agreement being quickly followed by reports of a tentative agreement. None of this did anything to impress, nor promote enthusiastic risk taking. Apparently in Greece, the issues regarding supplementary pensions or paying themselves continue to be unresolved!
The overwhelming consensus is for the ECB to remain on hold today. It would be a market surprise to see any material change in policy guidance during the ‘precarious’ periphery negotiations. In reality, it’s probably more prudent for Draghi and company to wait for the results at the end of the month of the three-year LTRO before considering additional easing measures.
The first operation has been very successful, succeeding in tightening sovereign spreads in both Italy and Spain and kick-starting a relief rally in the other asset classes. Draghi’s shift of the ECB to “lender-of-last-and-first-resort has removed a significant tail on the risk spectrum and slowed the potential for contagious transmission of any further sovereign stress.†In hope, the second three-year should ‘add more fuel to the fire.’
What can we expect in the Q&A session? First, maybe some light on the additional collateral eligibility that was promised at the last meeting, and furthermore, certainly something on the ECB’s willingness to participate in the restructuring of Greek debt. That question is always a crowd pleaser! Market reaction is set to be muted if the ECB keep rates unchanged. A rate change or new instruments would be a major surprise and the market would react accordingly. The EUR like any other domestic currency is vulnerable to an excessively hawkish message. Already the single currency should be reacting to the possibility of a large liquidity injection in late February, however, prudently thus far, the EUR moves remain orderly. Why? It seems too many in the market have the same position on! There is no need to spoil it for themselves.
What can we expect from the BoE’s “the King’s speech� It seems to be a close call, the weak majority expect the BoE to announce an expansive asset program (around +GBP50b). If so, do not expect it to be an unanimous vote. The surprisingly stronger PMI prints, receding risk of another Euro-zone crisis and the fluidity in domestic bank funding conditions of late, are strong enough reasons to keep the asset program well enough alone at this time. Unlike the EUR situation, it is more clear cut for Cable, an unchanged policy or a signal of an end of QE would clearly be positive for the currency. GBP along with its AAA moniker will remain a strong currency alternative to the EUR, even with a QE expansion. With a PSI agreement the market will have participation questions and concerns and because of that, investors always require an alternative!
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No EURO Freeze just Squeeze
