ECB's new bazooka

The ECB Governing Council has announced its first QE programme, as it has decided to purchase EUR60bn of public and private assets per month.

• Very importantly, the ECB purchases will be open-ended as they ‘are intended to be carried out until end-September 2016 and will in any case be conducted until we see a sustained adjustment in the path of inflation’.

• The purchases will start in March and run at least until September 2016. This implies purchases of around EUR1,100bn in total.

• The average pace of ABSPP and CBPP3 is EUR12bn per month since the programmes were launched. Hence, this leaves around EUR50bn to be split between sovereigns and agencies and the total amount of purchases will be around EUR900bn.

• The purchases will be made according to the capital key. Additionally, ‘with regard to the sharing of hypothetical losses, the Governing Council decided that purchases of securities of European institutions (which will be 12% of the additional asset purchases and which will be purchased by NCBs) will be subject to loss sharing. The rest of the NCBs’ additional asset purchases will not be subject to loss sharing. The ECB will hold 8% of the additional asset purchases. This implies that 20% of the additional asset purchases will be subject to a regime of risk sharing.’

• Furthermore, the pricing on the six remaining TLTRO operations was lowered by 10bp to the MRO rate.

• Overall, this was a very dovish introductory statement from Mario Draghi.

Market implications

• The market reaction in EUR swaps was not significant, as the programme is almost in line with what was leaked yesterday. Short-end rates are marginally lower, probably due to the minor reduction in the cost of TLTROs. There is limited downside to EUR swap rates 0-3Y, as the market is already pricing in very low fixings. Bunds are seeing some support from the confirmation of the programme but we are not looking for a continued rally in Bunds at this stage. However, we would expect Bunds to outperform against the 30Y segment and the curve to steepen from the very long end as higher growth and inflation are gradually priced in. Hence, we also look for a steeper 10/30 swap curve.

• EUR: The initial reaction in EUR/USD is fair (testing 1.15): this is EUR negative due to the programme’s size and open-ended nature. We expect the EUR to stay soft near term as markets digest this, especially with the Greek election looming and the uncertain Russian situation in the background. However, if we are right in projecting a euro recovery in H2 and that risk markets should perform on this, it should eventually turn EUR positive. Alongside an oil price trough and past EUR weakness, this builds the case for a euro rebound on a 6-12M horizon. We still target 1.10 in 6M followed by a shallow rebound to 1.12 in 12M, i.e. the euro will be weak now rather than later. The ECB has officially joined the global currency war with its long-awaited QE scheme – indeed, a weaker EUR is a key channel through which ECB QE could help spur a eurozone recovery.

• CHF: EUR/CHF is stable post the ECB and thus the SNB may have been countering EUR/CHF downside: although in principle the SNB left the currency war last week when abandoning the EUR/CHF floor, it still seems keen to steer the Swissie to mitigate the adverse effects of CHF strength on the domestic economy. The SNB’s options include further rate cuts, CHF selling and maybe also adjusting the terms on sight-deposit accounts.

• USD: This raises the question of whether the Fed will tolerate a stronger USD? On the one hand, ECB action should make the Fed less keen to hike in the near term; on the other, to the extent that the ECB move stimulates global growth, Janet Yellen may still wish to move ahead and normalise policy. With ample room for the Fed to be priced more aggressively in our view, USD strength should remain for now.

• The EUR fell against Scandi currencies on the back of the announcement as expected. We expect Scandi currencies to strengthen further against the EUR on the back of the ECB announcement. In particular, we expect EUR/NOK to fall given widening interest rate differentials between Norway and the euro area and early signs that oil prices are nearing the bottom. We forecast EUR/NOK and EUR/SEK at 8.75 and 9.30, respectively, in 1M. Further out, we expect EUR/NOK to bounce back ahead of the Norges Bank policy meeting in March on expectations of further Norges Bank easing.