Ok, well Draghi has himself a communications challenge today and to the extent this was already going to be a tough one, Steve Mnuchin has made the situation immeasurably tougher this week with the weak dollar rhetoric in Davos.
As a reminder, the euro was coming off its best year against the dollar since 2003 and starting with the news that China is considering “slowing or halting” its purchases of U.S. Treasurys, the single currency got another shot in the arm, only to be supercharged further by the market’s hawkish interpretation of the December minutes and now by Mnuchin:
The “problem” here is that as the econ continues to come in strong in Europe, markets are increasingly latching onto the idea that ECB will call an end to APP in September as opposed to tapering a bit further and extending it through the end of the year. While it’s accepted that there will be no hike prior to the end of QE, pulling forward the cessation of APP necessarily pulls forward expectations for a hike and so, the euro rally has legs.
Obviously, if the euro gets too strong, you end up imperiling progress on the inflation front and on and on. It’s the policymaker paradox again. Here’s BofAML on Draghi’s communications challenge:
During the last two weeks markets have reacted to every single comment from ECB speakers. Far from the “peace and quiet” the ECB probably thought it had bought itself last October, this clearly suggests the press conference next week will not be an easy one for Draghi. In our view this reflects what we have highlighted before: changing one part of the forward guidance opens the door to the market questioning every single bit of it. Still, we would expect Draghi to emphasize that any changes to forward guidance will only be gradual and that the sequencing (rate hikes only after net QE purchases are over) is something that won’t be altered. Those expecting rate hikes at the end of this year may end up being disappointed.
For their part, Barclays says Draghi will “deliver a balanced message which does not dismiss discussions around forward guidance changes in the coming months but still reinforces the broadly very accommodative outlook and curbs unwanted EUR strength [and] in that respect, we expect some profit taking of long EURUSD positioning ahead of the meeting.”
So with that as the setup, here’s the statement, presser later.
At today’s meeting the Governing Council of the ECB decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.40% respectively. The Governing Council expects the key ECB interest rates to remain at their present levels for an extended period of time, and well past the horizon of the net asset purchases.
Regarding non-standard monetary policy measures, the Governing Council confirms that the net asset purchases, at the new monthly pace of €30 billion, are intended to run until the end of September 2018, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim. If the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, the Governing Council stands ready to increase the asset purchase programme (APP) in terms of size and/or duration. The Eurosystem will reinvest the principal payments from maturing securities purchased under the APP for an extended period of time after the end of its net asset purchases, and in any case for as long as necessary. This will contribute both to favourable liquidity conditions and to an appropriate monetary policy stance.
The President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 14:30 CET today.