We wrote — when talking about the ECB’s potential move to a tiered depo facility which would allow a deeper cut than expected into negative territory on Thursday – that Draghi was in the somewhat relaxed position of being able to follow where other central banks had gone before.
We were of course referring to the Swiss and Danish central banks, which are currently at -75bps versus the ECB’s -20bps and have in place versions of the tiered model being mooted for the ECB.
But… Nomura’s Jens Nordvig thinks we were being too casual in our comparison. The ECB needs to be analysed as its own central bank because: Read more
Ignoring the fact that the euro is acting more like a random walk model than usual, one seemingly obvious consequence of Draghi’s swarm attack is the euro’s growing attraction as as funding currency. As Barc said:
The structural selling of EUR vol post-meeting was the standout FX trade. We view this as further evidence that the current carry-supportive environment characterized by accommodative global monetary policy, historically low vol and strong equity market performance is likely to continue. It also supports our view that the EUR should be the funding currency of choice.
And from BoNYM’s Simon Derrick over the weekend: Read more
Japanese investors are a powerful bunch in world markets. For a microcosm of this, just look at Australia; Japan plays a big role here in debt and in turn, in currency; and it’s a market that has been very attractive to foreigners of late, keeping the currency stubbornly high regardless of price changes in the country’s key exported commodities. BUT, as with everything yen at the moment, there is a serious shift going on. Read more
From the ECB’s September update on monetary developments in the euro-area released on Thursday:
That’s euroland M3 – the broad money supply measure — coming in below expectations and dropping again to 2.7. Really brings to mind Draghi’s warning to the Bundestag that “In our assessment, the greater risk to price stability is currently falling prices in some euro area countries”, doesn’t it? Read more
Draghi-day has dawned.
We have a fair idea about what is going to be announced – if the leaks are to be believed we should expect unlimited, sterilised purchases at the short-end, no yield caps, conditionality and a solution to seniority - but there are plenty of grey areas remaining. Read more
There are some obvious questions going into Draghi’s meeting on Thursday after a few of the early details were reported today — What will be the terms of conditionality? Where on the curve will the buying be concentrated? — and we’ve got a few more.
This isn’t meant to be a comprehensive list, so don’t jump down our throats if we’ve left any out. And we also recommend this Money Supply post last week by Claire Jones, which covered some of what’s below in more detail. Read more
Draghi-day is just around the corner and JPM’s Malcom Barr is of the opinion that the ECB might just kick off its move by purchasing short-dated Portuguese sovereign debt.
Heck, why not? The arguments to intervene are simple enough. Read more
Ebenezer Draghi sighed. These bank books would never come out right, and it was Christmas Eve already. As he struggled, the numbers began to swim before his eyes. So many hundreds of billions of euros, so many classes of security, collateral, refinancings… He started to doze. He found himself back a decade, in that glad, confident morning when the world was fresh and new, and the first currency to be entirely illustrated by pictures of fantasy bridges was sprung on a delighted world.
How wonderful life was then! Those perfidious Brits had, predictably, declined to join the euro, but we’d show ‘em! The single currency would be the cement that held Europe together, financially as well as symbolically, and would soon threaten the greenback as the world’s premier medium of exchange. Knocking the Yanks off their perch while leaving Britain in the slow lane. What’s not to like? Within a decade the economies of north and south would have converged into one magnificent powerhouse. The euro would have become a deutschemark with a suntan. Read more
A last-ditch rescue plan for the eurozone has started to take shape after Mario Draghi hinted that a “fiscal compact” could pave the way for a more aggressive European Central Bank response to the region’s escalating debt crisis, the FT reports. An agreement binding governments to strong rules on public finances would be “the most important element to start restoring credibility” with financial markets, the ECB president told the European parliament on Thursday. “Other elements might follow, but the sequencing matters,” he added. His comments on Thursday indicated that the ECB could ramp up its bond buying programme after a European summit on December 9. Mr Draghi argued a fiscal compact could act as “long-term” anchor for confidence, while also boosting investor trust in the short term. Underlining the need for immediate action, he urged eurozone leaders to keep their options open on how European economic integration could be implemented. While “far-reaching” changes to European Union treaties “should not be discarded”, he argued that “faster processes are also conceivable”.
Mario Draghi launched his presidency of the European Central Bank in bold fashion by cutting official interest rates, but warned eurozone governments that they could not rely on the bank to backstop their finances, the FT reports. The cut in the ECB’s main policy rate from 1.5 per cent to 1.25 per cent was justified by a “mild recession” looming in the eurozone by the end of this year and significant downward revisions to the bank’s 2012 growth forecast, Mr Draghi said. But he also took a swipe at eurozone leaders for even raising the possibility of Greece quitting the 13-year-old monetary union. Exiting the eurozone was “not in the [European Union] treaty,” he said bluntly, reflecting ECB alarm over the signal sent about investing in the eurozone. The interest rate decision suggested a pragmatic approach to dealing with the escalating eurozone crisis by the normally cautious ECB, with Mr Draghi apparently unafraid of his first act being to cut official borrowing costs.