Spring Avitaminosis Europe in Search of a Remedy

Europe in search of a remedy: At the beginning of implementation of the March euro QE program, we should expect a surge of interest to risks
Last week was quite volatile, and now the market needs a break for rebuilding of the leading trends. Europe is expecting not only QE parameter details but also the decision from ECB meeting on the reversion of rights to Greek banks for pledging of bonds against centralized loans. Again, we can see an example of how the market is being effectively manipulated. FOMC concerns with regard to inflation slowing down in the texts of the last meeting protocol publication was presented as negative for US dollar; however, in reality, it turned out to be a shot in the foot for all currencies, since it caused investors' panic before the release. Strong statistics from the USA and Yellen's statement supported dollar that was already too overvalued, having brought the idea of rate increase to the market in June of this year.

ECB meeting content will hardly be more interesting than the January announcement with regard to the launch of the program. Investors are surely interested in the volumes and details of the program; however, the reaction of the market is expected to be weak, since, in principle, everything was said before. Meanwhile, Draghi's conference must be interesting even for the reason that he will have to give clear explanations regarding the following issues:
Date of commencement and mode of bond purchase. If (as it was promised) purchases will begin in the first half of March, there is no time left to postpone publications of the Legislative Act. The 13th is the latest date for starting purchases.
Terms of purchase of securities with negative yield. In January, Draghi gave a short "yes" answer to this question but did not give any details. This time, at least German officials responsible for the operational part of the asset transaction will demand details.
It needs to be explained, at last, what the term "open date" means. Draghi will need to give a clear explanation regarding the difference in the weak wording of the introductory declaration ("until the end of September 2016") and the stronger text of the QE press-release ("at least, until September 2016"). Moreover, as early as at the beginning of 2016, the planned inflation must exceed 1%.
Existing limitations for purchases of their own countries' securities for national central banks.

Equal distribution of profit/losses from purchase of assets is promised; and that is easier to arrange through separate purchase of only national bonds in order not to tamper with sharing of profit. Immediately, the problem of Greece arises, because since February, ECB does not accept Greek bonds as securities; however, in the light of extension of the program, variants will be possible. ECB's comments with regard to the planned publication of new forecasts on growth and inflation for this year, for 2016 and the initial calculations for 2017 are mandatory.

There is no clarity or trust in the issue with Greece; the threat of default within the nearest 3-4 months is still real. Despite very severe requirements, its new leaders still comply with creditors' demands; however, dissatisfaction regarding non-fulfillment of pre-election promises is already developing. Blackmail plans by leaving Eurozone did not prove fruitful, the debt crisis continues, and now the financial system looks worse than before the elections. The market has been quiet with regard to this issue so far. Let's not forget that the plans for "Euro repair" of the economy have not been universally approved. Besides Greece, France and Italy present a potential threat, since they do not want to adapt at a loss of business, trade unions, and local bureaucracy interests. It's not a problem yet; however, Germany, which is expected to increase its domestic demand in order to balance the inflation at the expense of the Eurozone's largest economy, is beginning to make ECB worried. Nevertheless, things do not progress beyond various variants of agreements in regard to increasing industrial salaries. That is even more dangerous, considering that the regulator may have problems with buying particularly German debts, since the volume of their issuance in 2015 is planned in the amount of 150 bln. euro, and ECB plans their purchase in the amount of 215 bln. euro within the period from spring 2015 until fall 2016.

In the result, the European money is not in a hurry to leave the financial sector for real economy, since owing to low credit interest rates and existing high-yielding assets on the market, profits can be made even this way. In fact, only growth of European consumers' interest to purchases and "wasting" of savings is beneficial to the growth of euro, and cheap currency under low oil prices slowly contributes to the recovery of the exports sector. Let's hope that everything will only work according to the general plan.

At the beginning of implementation of the March euro QE program, we should expect a surge of interest to risks. Europe is not planning a rate increase in the nearest future, and euro will be actively used as a funding currency. Last week, market participants reduced short positions in euro, generally, by 7.5%; however, the bearish trend of EUR/USD is not abandoned. Technically, expiration dates of March option contracts for the next week put pressure on euro - closing of accumulated volumes will lead to strong surges. Presently, 1.1235/40 looks like the strongest level. By all appearances, Draghi will not be able to reverse the pair upwards, and euro can stay in the range of 1.1175 – 1.1250 until NFP.

作者: Navsher Bartash,
ForexChief Currency strategist