Possible action | Probability |
Could extend the maturity of its QE program | Currently scheduled to end in Sep 2016, Hard to sell |
Increase the size of the QE | Hard to Sell, but bond markets appear to have price-in the possibility of a this move. |
Diversify the composition | Consider buying rebundled loans at risk of non-payment, Implement a two tier charge on banks that park their cash at the ECB |
Lower interest rates further | Deposit rate cut likely. German 2-year yield trade around -0.40% Refi rate cuts unlikely |
Bloomberg survey says
80% of market participants expect them to extend the QE program past Sep. 2016, around 65% expect them to increase the amount of purchases, and about half expect them to broaden the range of assets that they buy.The participants expect the ECB to cut the deposit facility rate to -0.30%, with several economists looking for -0.40%. No change is forecast for the Refi rate or marginal facility.
What is priced-in?
- The German yields hit record lows multiple times in last one month or so. The EONIA futures point to a drop in the deposit rate.
- Speculators are heavily short on the EUR. The net short positions are at the largest since the week of May 12, 2015.
- Overall, the deposit rate and a minor tweak in the QE program appears to have priced-in and this presents a risk of a quick fire unwinding of the EUR shorts (if deposit rate is cut as expected) during the 45 minute gap between the rate decision and Draghi’s Press conference.
EUR/GBP: Broader Range – 0.7232-0.6859
![EURGBP broader range EURGBP](https://oldfxstreetbackups.blob.core.windows.net/reports/bcd85038-c6bf-4c5f-ad31-bb7d255bcf35/eurgbp+(1)_20151202154507.png)
- The EUR/GBP pair could drop to a low of 0.6859 (May 2007 high) in the next couple of days if the ECB comes out more aggressive than expected.
- On the other hand, if the ECB falls short of expectations could see the pair jump to 0.7232 (Trendline resistance: June 2010 low-July 2012 low).
- Meanwhile, if the ECB meets market expectations – deposit rate cut, minor tweak in QE program – could see the pair test 0.7139 (161.8% of Dec 2008 high-June 2009 low-Oct 2009 low).
CHF to follow EUR
![EURUSD vs USDCHF chart EURUSD vs USDCHF](https://oldfxstreetbackups.blob.core.windows.net/reports/bcd85038-c6bf-4c5f-ad31-bb7d255bcf35/eurusdusdchf_20151202154536.png)
- CHF is likely to follow the EUR after the rate decision and Draghi’s presser. The inverse correlation between EUR/USD and USD/CHF (direct correlation between EUR and CHF) has strengthened significantly from mid-October as markets believe the SNB would follow the QE.
- So more action from the ECB tomorrow could trigger expectations of retaliation from the SNB and vice versa.
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