What To Expect From ECB? - Views From 20 Major Banks

The following are the expectations for today's ECB January policy decision and its potential impact on the the EUR as provided by the economists and FX strategists at 20 major banks.

Goldman Sachs: We expect the ECB to announce on Thursday a sovereign debt purchasing program sized between EUR500bn and EUR1trn with purchases to be mutualized. We think full mutualisation will be more effective in impacting EUR/USD. That is because the Euro downtrend has in our minds always been about regime change at the ECB, the switch to a more activist central bank that began with President Draghi’s pre-announcement of the deposit rate cut in May. The cleanest continuation of that regime break would be to announce fully mutualised bond buying, not least since this would go furthest towards relaxing fiscal constraints on the periphery, thereby boosting inflation expectations. But even if sovereign bond purchases end up not being fully mutualised, GS thinks President Draghi will find a way to surprise the market on the dovish side (potentially on the size of the program or speed of purchases).

Citi: Citi Research expects EUR600bn focused on government bonds, to be completed over two years, with limited direct mutualisation of any losses. They regard such a program as far from optimal: but a limited program may well be needed to get wide support. Citi Strategy believes that the devil lies in the details. They says, “Short EURUSD positions are long established, but a weaker EURUSD still remains our central scenario, expecting 1-2% in weakness on the day of the ECB. Risks remain to both sides of our view, with the medium-term trend depending on the program details. The Greek elections will either add or remove tail risk from the market. Read here. Citi FX Technicals say that caution is warranted on the short term and that a corrective squeeze higher in EURUSD from the present range remains a danger.

BofA: We expects the ECB to announce at its meeting tomorrow government bond buying (without adding corporate bonds) of between €500 and €700bn over 18 months. 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. 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. 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.

UBS: UBS' base case is that the ECB is set to announce purchases of EUR 1trn (sovereign debt, possibly augmented by corporate and supranational debt), but leave the door open for more in the future, should inflation fail to move back towards the target of "close to but below 2%" within an acceptable period of time. The dominant sentiment in FX markets seems to be scepticism and many seem to expect the ECB to underwhelm. However, we think the market may underestimate Mr. Draghi's determination. The ECB is well aware of the risks associated with disappointing markets on QE and will try hard to surprise to the upside, in our view. A bolder than expected move by the ECB would be euro negative initially. Depending on how powerful the communication is, the downside for the euro could quite easily be towards 1.10 against the dollar.

Deutsche Bank: Consensus for today is that the ECB commits to meeting its 1trillion balance sheet target via a combination of TLTRO, sovereign, ABS and covered bond purchases, in turn implying a ~700bn government bond-buying program. We see three sources of dovish surprises to this baseline. First, the ECB may raise its overall 1trio balance sheet target given the deterioration in the inflation outlook since the number was set last September. Second, even if “intellectual” consensus has moved towards 700bn of bond buys, European short-end yields are still not consistent with this level of liquidity injection into the system and can move lower. Finally, Draghi’s forward-looking language will be just as important: an aggressive commitment to do more can allow the market to expect more irrespective of the initial headline.

BNPP: A powerful announcement from the ECB which revives confidence in the central bank’s ability to meet its 2% inflation target over time would push real yields lower. For this reason, we would be cautious about assuming a ‘buy the fact’ EUR reaction to an announcement...In assessing the potential impact on inflation, the market will likely focus primarily on the size of the programme, and we would emphasize that attention should focus on the broader balance sheet target. A relatively modest initial target for sovereign purchases could be couched in a firming of the EUR 3trn balance sheet target that has been referred to in the past, implying that sovereign purchases could increase if needed to meet the target. We remain broadly bearish on the EUR and are short EURGBP heading into the meeting.

Credit Agricole: We remain of the view that the EUR is facing additional downside risk in the weeks to come, mainly on the back of firm central bank easing expectations. While we expect the ECB to at least match market expectations today when it comes to large scale asset purchases, the risk of a more aggressive than anticipated commitment should not be underestimated. This is especially true as inflation expectations as measured by 5y forward inflation swaps have been strongly capped regardless of increased easing expectations and the single currency’s recent depreciation. Should, against our expectations, the ECB disappoint, we still expect any position squaring related EUR/USD upside to be well contained below 1.2000. We continue to target the pair at 1.10 by the end of March.

Credit Suisse: We expect the ECB to announce Sovereign QE with a 70% probability. Proper bond buying should start before mid-February. Our base scenario entails €500bn-€750bn of sovereign investment grade bond purchases. We don’t exclude the potential for an ECB upside surprise on the amount...Our central scenario is that most roads still lead lower for the EUR at this time.

SocGen: There will a lot of detail to absorb from the ECB meeting. It seems almost certain that sovereign bond purchases will be announced; likely that we will see at least €50bn per month for at least a year; possible that they extend it to cover long-dated debt. The more they buy, in terms of quantity, duration and in extending beyond Aaa to all investment grade (but probably not beyond), the better for risk sentiment. Yesterday afternoon, newswires reported that the Executive Board proposed buying €50bn of bonds through 2016, prompting much debate about whether that meant one or two years’ worth of purchases (ie, €600bn or over €1trn) and considerable volatility. So much for the idea that ECB action is priced in and it will all be a damp squib. The press commentary this morning is that the initial proposal (to be debated by the ECB Council) is for €50bn per month for at least a year. The SG view is that the programme will be consistent with the stated aim to grow the ECB’s balance sheet by €1trn, and that will eventually require over €500bn in government bonds and €400bn in private sector assets through one programme or another.

Nomura: We believe around €700-750bn of additional assets purchases (i.e., on top of the existing measures of CBSPP3, ABSPP, TLTROs) are needed to achieve balance sheet expansion to around €3trn by mid- to end-2016. However, our baseline remains that the ECB communicates a monthly flow of public and private sector asset purchases of at least €40bn per month (calibrated upon reaching €3trn by end-2016), for as long as necessary conditional upon the inflation outlook. The respective sovereign bond purchases would be close to €25bn per month, allocated according to the ECB capital key (with small adjustments to control for too-small markets in some countries). RBS: Market expectation for Thursday’s ECB meeting are running high but we doubt that ECB QE is yet fully priced. Thus we expect further EUR weakness if/as the ECB announces sovereign QE this week of EUR 500bn or more.

SEB: Given the ongoing sluggish economic recovery and the fall in medium-term inflation expectations already posted, the Governing Council will likely introduce a broad-based bond purchasing program. We expect it will be designed to ensure that the ECB balance sheet will be expanded by around EUR 1tn over the next two years, not more. The Governing Council may well conclude that initial purchases totalling EUR 500bn over such a period could suffice to reach this target. To start with, buying will mainly focus on government bonds. Purchases will be weighted according to the shares of the ECB's own capital and central banks of the Eurosystem will buy bonds of their own country and take the responsibility for any credit losses. Thus, there will be no risk sharing between the national central banks of the Eurosystem. There will also be upper limits to which purchases are possible. Market expectations are already fairly high, with players now discounting buying of at least EUR 500bn. Any delay in the program would come as a big disappointment to financial markets.

Westpac: Looks like the long awaited QE programme will be announced but with final details yet to be ironed out. Press comment a programme of Euro 50bln buying per month "into 2016" but is that a 1 year programme totalling E600bln or E1.1tln to end 2016. Suppose Draghi could keep it vague so as to 1. Keep options open and 2. Appease opposition who would be satisfied but not delighted with E600bln. Draghi could suggest a “broad consensus” in support of it but that the formal vote awaiting the final design inputs from the staff in March ie as to who does the buying and what do they buy?

BTMU: if the ECB commits to buying government debt for a full two-year period at a rate of EUR 50bn per month, the financial markets are likely to be impressed – a EUR 1.2trn program is much larger than consensus and would initially boost equities and weaken the euro further. The initial response is always more likely to be more linked to the size of the buying the bigger the amount is, with the finer details of the mechanics of implementing it and how the risks are shared coming afterwards. We still see some prospect of a correction higher in EUR/USD once we get beyond today’s announcement. However, a EUR 1.0trn or EUR 1.2trn package would certainly weigh on EUR/USD further for a period and any correction for EUR/USD would be from lower levels than here. Still, a near 10% drop in EUR/USD in a month clearly shows some large element of today’s QE plan is already priced. Like elsewhere when QE has been implemented, the more impressed the market is the better equities should perform and the higher 10-year bond yields in Germany should be rise initially.

Morgan Stanley: Our economists’ base case remains that the ECB announces QE in March, with a strong easing signal next week. In that scenario, we would anticipate a broad waning of risk appetite given the recent build-up of market expectations. JPY and USD would rally on safe-haven inflows, while highyield G10 and EM would suffer. We would also sell any kneejerk EUR rally as structural outflows would dominate. However, an aggressive ECB program next week would represent another major phase in the global trade of deflation, likely raising pressure on other central banks that face similar deflationary threats. Risk appetite would be likely supported in this scenario and we would expect EUR/USD to head towards our bear case of parity, while USD/JPY would also rise in sympathy.

Danske: We expect the ECB to announce government bond purchases of EUR750bn today. This would be slightly positive for the market, where consensus for purchases seems to be building somewhere around EUR500-600bn. While the aggregate headline figure is the focal point for the market, the pace is more important in our view, as the aggregate size and composition are likely to be altered along the way.

NAB: We suspect however, that after sifting through the detail, markets will be left wondering about the potency of the ECB’s plan and that combined with market positioning will lead to a short-covering rally in EUR/USD. We’re not calling time on the EUR’s decline in the big picture however and divergence is still the main game in town. But we suspect we may get better levels to re-enter a short position.

Barclays: We expect the ECB’s Governing Council policy meeting today to end with an announcement to expand its asset purchase programme and include government bonds (with some limits to risk sharing within the Eurosystem in the event of a sovereign debt restructuring) and possibly other euro area financial assets. We expect a commitment (at least through mid-2016) to monthly total asset purchases (EUR50bn, according to the latest news reportedly based on a leaked ECB staff proposal) until the ECB’s immediate target (balance sheet expansion of about EUR1trn) has been met. The latter, however, could be adjusted in both directions, up or down, if required by the ECB’s ultimate target to bring back inflation over the medium term to close to but below 2%.

ANZ: it is widely anticipated that ECB President Draghi will outline a programme at this week’s ECB meeting. But as of yet, nothing has been agreed and there is still uncertainty over the timing of when such a programme could start. Much of the expected QE may already be discounted in the euro’s price, but assuming QE is confirmed, Draghi is unlikely to confirm that monetary policy has hit its limits. In combination with a negative deposit rate, that provides an unfavourable monetary backdrop to the single currency.

Rabobank: Pressure on the ECB to embark on quantitative easing has mounted in recent weeks and a pre-announcement of ECB QE on 22 January is now all but certain...However, the fact that this measure of inflation expectations has only slipped further with mounting QE expectations (in a recent Bloomberg survey, 93% of the respondents expects a QE announcement this week) is a discomforting idea, if you think about what QE is supposed to achieve. Taken at face value it indicates that market participants are skeptical about either the size or efficacy of a forthcoming QE program. Whilst we count ourselves among this group (and we suspect some ECB Governing Council members as well) the question is: why do something that is so politically sensitive if you don’t even wholeheartedly believe in it?

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