EUR: A breach of parity remains our call – MUFG

Derek Halpenny, European Head of GMR at MUFG, explains that yesterday’s ECB decision was a bit of both tapering and easing but MUFG ultimately agree with what has been the financial markets’ initial conclusion that this was an easing of monetary policy.

Key Quotes

“Perhaps the ECB has taken a leaf out of the BoJ policy strategy book by focusing more on a strategy of altering its QE program in order to strengthen its longevity. By reducing purchases to EUR 60bn per month, the ECB was able to run it throughout 2017 and President Draghi was in a stronger position to state that tapering was not on the agenda yesterday and that the central bank would remain active for “a long time” given that “uncertainty prevails everywhere”. The total asset purchase announced yesterday was EUR 60bn larger than expected with Draghi strongly downplaying any idea of the program being run down.”

“In that sense we agree with President Draghi that this is not “tapering” in the sense of the Federal Reserve in mid-2013 when markets went into turmoil. That event in 2013 was sparked by a mere mention in a speech by Bernanke. Draghi yesterday spent a lot of time telling the markets this QE program has a long time to run.”

“There were a number of key elements of yesterday’s announcement that make this a more dovish event than expected that we believe reinforces the downside risks for EUR/USD and that keep our forecast of a breach of parity in H1 2017 in play. Firstly, the larger overall size – EUR 540bn versus EUR 480bn expected of new asset purchases. Secondly, the much more subdued assessment of the inflation outlook revealed in the updated inflation forecasts. While the 2017 forecast was raised from 1.2% to 1.3%, the 2018 forecast was cut from 1.6% to 1.5%. The first 2019 forecast was put at 1.7%, still below the official inflation target. Draghi himself acknowledged worryingly that he saw no difference in the inflation outlook today compared to when QE began in January 2015. Thirdly, the scrapping of the self-imposed ban on buying securities yielding less than the deposit rate of -0.4% has removed an effective lower bound from short-term securities. Changes to collateral rules in regard to the PSPP lending securities program will also reinforce downward pressure on short-term yields through an improvement in liquidity conditions.”