Way to go before ECB action unless Draghi surprises everyone

Outlook

This week includes the BoC policy meeting and the minutes of the Beige Book ahead of the April 29-30 FOMC. We also get UK inflation and employment data, and China reports Q1 GDP, industrial output and retail sales. In the US today, retail sales and business inventories, yawn.

Aside from the Ukraine/Russia story, the news of interest to us is the seemingly growing interest in QE at the ECB. On Saturday in Washington, Draghi said “a stronger euro from here will require further stimulus,” according to the WSJ. BoF Gov Noyer will speak today and probably promote a weaker euro, as is his wont. The juicy news comes from the FT, which reports Coeure hinted the ECB could be buying a range of assets with maturities up to 10 years—but not before cutting rates first.

“If the ECB were forced to resort to QE, Mr Coeuré’s comments indicate any programme would include private sector as well as public debt, and would involve buying instruments which mature in anything from one to 10 years. He also suggested the ECB could buy different assets in different member states to take into account divergences between lenders and capital markets across the region. The aim of any programme would be to lower the cost of borrowing by similar rates across the region, which has suffered from financial fragmentation. ‘Asset purchases in the euro area would not be about quantity, but about price,’ he said.”

Implementing QE is tricky, because the politically acceptable class of securities is asset-backed or private sector debt, and it’s thin on the ground. No one is saying so, but the opportunity for favoritism and corruption is huge.

Coeure said a rate cut comes first, before QE, so unless Draghi plans to surprise everyone with an inter-meeting cut, we have a way to go before anything real materializes. But the opening gap overnight shows the market is taking the threats very seriously, and as the wily Draghi no doubt knows, a threat must be followed by some action or the threatener loses credibility. The time is rapidly approaching when hot air won’t cut the mustard.

The combination of Russia/Ukraine and Draghi is pro-dollar, if for what we consider the wrong reasons. Buying dollars here as a risk-aversion play is not really to be pro-dollar, and can reverse all too quickly.

Note to Readers: Friday is a holiday in some countries (and Monday, London is closed). We will not publish a morning report on Friday.