EUR/USD: Nothing New From Draghi - QE Extension Expected In December

• The ECB left all its interest rates unchanged, in line with our and consensus expectations. The introductory statement was very similar to last month’s and the press conference did not provide new policy hints. However, Draghi’s remarks do support our view that in December QE will be extended beyond March 2017 at the current pace.

• In a relatively uneventful press conference, the most important message came when Draghi reaffirmed the Governing Council’s commitment to preserve the “very substantial” policy support that is embedded in the ECB’s staff projections and that is needed to push inflation back towards target. Considering 1. that this support reflects market expectations that stimulus will continue and 2. underlying inflation remains lifeless while inflation expectations still hover around record-low levels, we really do not see any other viable options for the Governing Council aside from extending QE beyond March 2017 at its current pace of EUR 80bn per month.

• That said, Draghi gave the impression that the Governing Council’s discussion is still at a very preliminary stage, with no clear view shaping up yet. Today he told us that QE extension and tapering were not discussed and that a sudden stop to the purchase program is highly unlikely. The market initially read as a hawkish message Draghi’s acknowledgment that stimulus cannot remain in place “forever”. But the market reaction has reversed soon.

• So any policy decision will be announced on December 8, when the new macroeconomic projections will be published (they will include for the first time numbers for 2019). What will the ECB do at that meeting? We remain convinced that the GC will opt for an extension of QE by six to nine months at the current pace. This would require EUR 480-720bn of additional purchasable assets. We estimate that, under current market conditions, raising the ISIN limit from 33% to 50% and applying the deposit-rate restriction to a portfolio of bonds rather than to individual bonds would free a sufficient amount of German paper to make this extension possible. Bank bond purchases do not seem to be on the agenda, while a deposit rate cut remains highly unlikely as its side effects would outweigh the benefits.

• Although there was no surprise in Draghi’s announcement, the EUR/USD broke below the June low at 1.0912. The bias remains on downside. A series of long black candlestick in October weighs heavily on the outlook. We expect the bear cycle to be continued down to 1.0826 –March low. However, it would be too risky to open a short position at these levels.

 

USD/CAD: Loonie Still Under Pressure Of Dovish BoC Tone.

• The CAD fell to a 1-week low against the USD yesterday, pressured by lower oil prices and the Bank of Canada's more dovish tone.

• Bank of Canada policymakers said on Wednesday they had considered adding more monetary stimulus and that export weakness could be harder to turn around than they had thought.

• What is more, broadly stronger USD encouraged crude oil investors to take profit on the previous day’s rally.

• Canadian Finance Minister Bill Morneau said he would provide an update on the government's economic and fiscal situation on November 1, which would take into consideration recommendations by an economic advisory council that included creating an infrastructure development bank and boosting immigration

• Canada's inflation report for September is due on Friday. Annual inflation is expected to pick up to 1.5% after slipping towards the lower end of the Bank of Canada's targeted range a month earlier. Also today, retail sales are expected to have increased 0.3% in August, rebounding from a decline a month before.

• The USD/CAD is in a consolidation phase. We expect the USD/CAD will rise near 1.3312, which is an October 7 high and close to the upper 14-day-ema Bollinger band. This could be a good level to open a short position in the speculative part of our portfolio.