The ECB statement was bang in line with expectations: the Bank’s APP programme will be extended from January to September 2018, with the prospect of increasing it even further if the economy needs further support, however the ECB will taper asset purchases to EUR 30bn per month from EUR 60bn per month currently.
ECB’s dovish spin sucked up by the markets
Although this is a serious step-change in the pace of QE from the ECB, from buying EUR720bn of assets per year to only committing to EUR 270bn for the first nine months of 2018, the ECB has managed to spin this announcement as a dovish development. Firstly, the Bank is willing to extend its APP programme if necessary, secondly, it reiterated that it sees interest rates remaining at present levels well past the end of QE. It also announced that it will fully reinvest all proceeds from assets held as part of the APP for an “extended period of time”. This was a new element of the ECB’s prior guidance, which was also likely designed to take the sting out of the tapering news’ tail.
The markets are drinking the ECB’s Kool Aid, EUR/USD fell some 50 pips on the statement’s release, while German 10-year yields also slid, however, we still need to hear from Draghi himself to decipher just how dovish or hawkish this announcement actually is.
APP’s final destination now in sight
One thing is for sure, the ECB has slashed the pace of its APP programme sharply and the APP’s final destination is now in sight. Tapering was the key part of today’s statement, however the ECB said all of the right things to placate the doves on the board. We believe that the tapering announcement itself should be considered euro positive, however, since the single currency is currently the best performer vs. the G10 so far this year, it is probably due a break from appreciation. Even so, we still think that the NZD, GBP and Scandi currencies remain vulnerable to further euro strength later this year. In fact, the euro still remains higher vs/ the NOK and SEK today, which gives some weight to the view that the ECB may only have a temporary dampening impact on the euro in the coming days.
What is bad for the euro is good for stocks, European markets are a sea of green today, with the Ibex receiving an extra boost from the weakening currency and is up 2% so far on Thursday. Interestingly, the Eurostoxx banking index has risen today even on the back of this news. The tapering of QE is actually good news for banks, as it could, eventually, put upward pressure on interest rates, hence banks are rallying on the back of the taper news, not necessarily the dovish spin from the ECB.