Market News & Insights
23 January 2015

Draghi Delivers the Kitchen Sink

EUR/USD 1.1263
GBP/USD 1.4980
GBP/EUR 1.3294 (0.7517)
EUR/CHF .9827
GBP/CHF 1.3058
GBP/AUD 1.8817

Cheap money is about to flood the Eurozone and the decline in the value of the EUR represents the commitment of Draghi and Co. to support the region and make good on their promise to “do whatever it takes”. The phrase “good media management” was touted about more than once yesterday, in reference to the apparent “leak” suggesting a €50bln program, the ECB surpassed this expectation and announced a QE program of €60bln per month, beginning in March and extending to (at least) September 2016.

This represents a balance sheet expansion in excess of the high end of expectations (€1trillion) and the immediate result was a rapid devaluation of the EUR against every major currency, as well as a huge rally in Eurozone bonds, with many peripheral nations seeing their bong yields drop to record lows. As we have seen with these programs before, the huge scale of QE has proved positive for risk appetite with Eurozone stocks leading the charge higher extending their largest 6 day gain since 2011.

Many EUR currency pairs dropped to fresh lows, EURUSD has fallen below 1.1300 so far this morning and the slide towards 1.1000 is well and truly under way. EURGBP dropped to fresh 7 year lows below .7600. Risk remained supported overnight with Asian equities rallying higher, following Europe and the US. The USD surged against many competitors, the greenback continuing to be an out-performer as heavy selling dominates its most liquid counterparts with selling seen in EUR, GBP, AUD, CAD, NZD CHF amongst others, as my colleague Conor says “the dollar is on steroids” and it’s not looking like leaving the gym any time soon.

The ECB’s QE program did top estimates but the make-up of the ECB’s targets was also interesting and more comprehensive than initially estimated. Draghi said they would not be shying away from purchasing bonds with negative yields and broadened the pool by adding European institutional and government bonds to the previously stated ABS and covered bonds, essentially mirroring the QE program first initiated by the US Fed some six years ago, which was closely followed by the BOE and the BOJ picking up the slack almost 2 years ago. Sceptics have already surfaced questioning the impact of this program in terms of achieving its economic objectives, especially as an attempt to target inflation, the above central bank programs have done little to tackle inflation, however in the US and UK growth objectives have been achieved. In order for this to work we need to see the banks open their lending books, this has long been an issue, the ECB has lived up to their end of the bargain but they have also been saying that everyone else has to do their part as well – time will tell.

There is further event risk for the Eurozone in the form of Greek elections, where the far left, anti-austerity Syriza Party look set to take the vote along with coalition partners. What this means for Greece’s Austerity measures and subsequent ECB/TROIKA aid is questionable, but certainly provides considerable risk for a Euro already under pressure. PMI data from the Eurozone headlines today’s European calendar but sandwiched between yesterday’s events and Sunday’s election risks the PMI figures are likely to be overlooked.

GBP has been suffering against the USD, pulled lower by USD demand the pound has suffered from a diminishing inflationary environment and shifting interest rate expectations. Last June BOE Governor expressed surprise markets were not shaping up for a rate hike by year end (2014), interest rate curves are now suggesting a hike may not occur until Q1 2016. This is a considerable shift in outlook and all eyes will be on BOE’s Governor Carney as he speaks at the world economic forum in Davos, any indication on potential BOE tightening, especially if sooner than priced should provide the pound a boost, but for now we trade back below 1.5000 and GBPUSD continues to be under pressure.