The ECB appears to be working hard to prepare markets for an announcement about its QE plans for 2018, next Thursday, suggests Kit Juckes, Research Analyst at Societe Generale.
Key Quotes
“An extension of QE is widely anticipated, but with some Council members canvassing for the programme t to end in 2018 and for the absolute size of the balance sheet being limited, the choice is between a faster pace or a shorter period of time, and slower bond-buying for longer. Buying less for longer without an explicit commitment to stop the programme on a given date is a likely compromise, which is hoped by some to push expectations of the first rate increase well into 2019 and thereby avoid putting upward pressure on the euro. Anatoli thinks we end up with none month extension at EUR 25bn per month, possibly also buying debt with longer maturities.”
“The FX implications are modest, though at the margin a slower pace of buying puts a floor under yields. The idea that pushng the first rate hike further away will hold the euro down doesn’t really make sense to me in the current environment. If markets conclude that QE IS going to end in 2018, they will also conclude that the ECB remains firmly on a path back to normal policies. I don’t see how a clear path to policy normalisation, combined with solid growth and a sizeable current account surplus, are consistent with a EUR/USD rate that is 7-10% below ‘PPP’ and 9% below the average of the last decade. EUR/USD is stuck in its 1.1660-1.1890 range and doesn’t look set to break out, but we still expect 1.27 by the end of 2018, and we expect EUR/JPY to go on rising steadily towards 140.”
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