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5 Jun 2014
How can Mr Draghi surprise? - Nomura
FXStreet (Bali) - Jens Nordvig and Franklin Wang, FX Strategists at Nomura, note that there are other ways to generate excess liquidity by the ECB.
Key Quotes
"First, non-sterilization of SMP holdings would seem relatively uncontroversial and logistically uncomplicated. Hence, that is clearly a possibility. Non-sterilization would generate around EUR170bn of additional liquidity and could help guide EONIA rates closer to zero, although it would lead to a question (why did you sterilize in the first place?)."
"Second, there is the option of fresh asset purchases. Fresh asset purchases would constitute a more potent surprise. But the actual announcement does not seem right around the corner. There are the usual logistical and philosophical obstacles, including disagreement within the Governing Council (see The Future Euro: hard or soft, 12 May 2014). Moreover, recent news reports (from the FT, Reuters, MNI) have focused mainly on the possibility of LTRO-type arrangements and more moderate ABS purchases, rather than something comparable in scale to the QEs done by the Fed, the BOJ and the BoE."
"The key question is whether Mr. Draghi will be able to pre-announce or hint at (in a less contingent manner than in recent speeches) that broad-based asset purchases in some form are getting closer, and perhaps even likely in the second half of the year."
"Finally, there are the details of the LTRO, which could be important to market behavior. To generate an incentive for banks to use it in size, it would have to be a fixed rate operation (as opposed to the variable rate operations in 2011 and 2012). If the tenor of the new LTRO is very long and the conditions attached are fairly lax, there may be room for a surprise here too."
Key Quotes
"First, non-sterilization of SMP holdings would seem relatively uncontroversial and logistically uncomplicated. Hence, that is clearly a possibility. Non-sterilization would generate around EUR170bn of additional liquidity and could help guide EONIA rates closer to zero, although it would lead to a question (why did you sterilize in the first place?)."
"Second, there is the option of fresh asset purchases. Fresh asset purchases would constitute a more potent surprise. But the actual announcement does not seem right around the corner. There are the usual logistical and philosophical obstacles, including disagreement within the Governing Council (see The Future Euro: hard or soft, 12 May 2014). Moreover, recent news reports (from the FT, Reuters, MNI) have focused mainly on the possibility of LTRO-type arrangements and more moderate ABS purchases, rather than something comparable in scale to the QEs done by the Fed, the BOJ and the BoE."
"The key question is whether Mr. Draghi will be able to pre-announce or hint at (in a less contingent manner than in recent speeches) that broad-based asset purchases in some form are getting closer, and perhaps even likely in the second half of the year."
"Finally, there are the details of the LTRO, which could be important to market behavior. To generate an incentive for banks to use it in size, it would have to be a fixed rate operation (as opposed to the variable rate operations in 2011 and 2012). If the tenor of the new LTRO is very long and the conditions attached are fairly lax, there may be room for a surprise here too."