As the ECB is poised to ease policy at tomorrow’s meeting and has a range of tools available to it, UBS looked at the likely market reaction under a variety of scenarios, and created a table which investors can use as a guide when the policy is announced.
What’s priced in?
“We think that the market is pricing a cut in the ECB’s deposit rate of 13.5bp on 3 December and by a further 6.5bp within the next 12 months. According to our calculations, ECB sovereign bond purchases are anticipated to increase by €8.5bn/month along with an extension of the end-date of the programme from September 2016. With sovereign bond purchases representing around 70% of all monthly asset purchases of €60bn this would represent a monthly increase in purchases of all bonds of about €12bn,” UBS argues.
How will EUR/USD markets move?
“If the ECB delivers more easing than markets are pricing, the year’s low in EUR/USD is likely to be tested, though we do not see attractive risk-reward to being short EUR/USD at current levels. The potential for QE2 to move the euro is less than was the case with QE1, given the different starting points for the currency, and better Euro area growth now than earlier in the year,” UBS advsies.
“Furthermore, although policy divergence may favor lower EUR/USD, economic convergence and valuation are pulling in the other direction. The gap between core inflation in the Euro area and US is the lowest it has been in a number of years, and the Eurozone’s manufacturing PMI is now actually higher than the US manufacturing ISM,” UBS adds.