Draghi takes plunge with the euro

One day after the central banks of England and Canada delivered their share of dovish surprises, the ECB had little choice but to deliver upon what will be the fastest balance sheet expansion in its history. It also occurred days ahead of an possibly unprecedented shot of uncertainty in Greek politics.

The ECB finally announced the much-anticipated the outright monetary transactions (OMT), involving the purchase of €1.1 trillion in private and public debt at the rate of €60bn per month starting in March into September 2016.

Exceeding in size and duration

The euro hits 12-year lows against USD as the announced amount and duration revealed exceeded yesterday’s leak, which indicated €50bn lasting into the end of 2015.

Disappointing in risk-sharing

The ECB added some colour to the OMT announcement, by departing from the securities purchasing program (SMP) set-up in May 2010, stating that that national central banks will assume most of the responsibility of the purchased assets in their country and there will be risk sharing on 20% of the assets purchased. The involvement of national central banks will reflect their capital contributions to the ECB.

Draghi noted the ECB could buy Greek bonds in July, in addition to those purchased in the prior SMP program.

EUR/USD tumbled by nearly 200 pips to a fresh 11-year low of $1.1456 as the anticipated injection of further euros into the system leads to a prolonged divergence of monetary policy paths between the Fed and the ECB.

Balance sheet divergence

Today’s QE announcement is in line with Draghi’s assurances that the ECB’s balance sheet will return to 2012 levels, meaning that the most telegraphed jump in the central bank’s will give little choice to traders but to keep selling the euro until credible signs of stability are seen in inflation.

And, regardless of the policy mix pursued, euro weakness will be part and parcel of it. Having broken below its 200-month moving average for the first time in 12 years, EUR/USD will fail to stage any real recovery above $1.18 and the break of $1.12 now appears to be a growing certainty.