Dovish Taper with No Tantrum: Patience and Persistence

The ECB delivered what the market expected in terms of the size and duration of the asset purchases. 
The ECB initial statement also included a dovish reminder of the extent of the
unorthodox monetary policy.  The full allocation of the fixed rate reports
will continue as necessary.  The proceeds from maturing issues will be reinvested for an extended period, and rates will remain at current levels
well past the end of asset purchases.  

The “lower for longer” scenario appears to be a victory for the
doves on the ECB, and is consistent with Draghi’s call for
“patience and persistence.”
  
Draghi seemed intent is encouraging the
market to push out in time when the first hike may be delivered.  The fixed rate and full allocation of refinancing operations will continue to at
least the end of 2019.  The ECB could lift its negative deposit rate while
the full allotment of fixed rate repos continues, but it seems unlikely to be delivered as soon as the market expected,
which was early 2019.  

The ECB’s balance sheet will expand by 180 bln euros here in Q4 and
another 270 bln euros in the first nine months of 2018. 
The Federal
Reserve’s balance sheet will shrink $30 bln in Q4 and another $270 bln in the
first nine months of 2018.  The Federal Reserve has signaled three hikes
next year, while the market has discounted a little more than one.  The
ECB will not hike rates next year, and it is possible that there still another
step toward tapering after Q3 2018, meaning the balance sheet expands for all
of 2018.  

Draghi emphasized three components for the transmission of monetary
policy
.  The rising stock of asset held.  The maturing issues
will be recycled, and the sums are
significant.  And there is forward guidance.  As we have noted, when
the reinvesting of the maturing proceeds is
coupled
with the new purchases, the gross
purchases will remain substantial.  

The euro recorded a low just below $1.1740.  A close below
yesterday’s low would be seen as a
bearish development.   We suspect the $1.18 area offers resistance. 
A break of the lower end of the recent range, around $1.1725 is needed to
signify anything of importance.  



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