ECB Preview - Scope For Disappointment?

Tyler Durden's picture

Thursday’s ECB meeting is important in the context of recent market moves and statements regarding the level of the euro. Citi notes that the rise in short-dated vol indicates considerable investor focus on the meeting. Expectations have been building that ECB President Draghi may offer a more cautious tone to ‘talk down’ the moves seen in the short-term rates and FX. In light of President Hollande’s advocation of an exchange rate policy aimed at ‘safeguarding competitiveness’, Draghi will likely face further questioning on FX. However, Citi does not believe that he will reverse his position and explicitly talk the currency down. Goldman also notes that while 'Taylor-Rule' users might infer a 30-50bps lowering of rates (thanks to growth, FX, and inflation) the improvement in 'fiscal risk premium' balances that dovishness leaving Draghi likely on hold. However, he is unlikely to stand 'idly by' without some comment on the ensuing currency wars.

Short-term, the LTRO repayment (and Fed QE4EVA) leaves EURUSD biased upwards on balance sheet the ratio of Fed/ECB balance sheets has now round-tripped to the start of LTRO2

though medium-term perhaps EURUSD is discounting the Fed's expansion and ECB stability...


but EURUSD has a bearish bias based on spread differentials...

Via Citi,

In the January press conference, Draghi stated that "[he] never comments on exchange rates". While the EUR NEER has appreciated significantly in January, the current levels are not ‘excessive’ when compared to historical averages. The proximity to "historical averages" is something which Draghi highlighted in the January press conference. Furthermore, Hollande’s comments met opposition from German Government Spokesperson Steffan Seibert who suggested "exchange-rate policies shouldn’t be an instrument to strengthen competitiveness,’’ and viewed the euro’s rise as an indication that “confidence is returning to the euro area”. We expect Draghi to largely echo these thoughts, while stressing that the exchange rate is merely an input variable into their monetary analysis.


As our economists have written, Draghi may adopt a more dovish tone to convince market participants that monetary conditions will remain loose, but we view any specific ‘talking down’ of the EUR as unlikely. Based on the check-list of indicators from the ECB’s January press conference (CDS prices, stock market indices, realised volatility, capital inflows, Target 2 imbalances, confidence indices, current account balances), market developments are likely to be viewed as broadly positive by the ECB more than offsetting any negative impact from EUR strength. Therefore, given expectations of a dovish statement, we think risk-reward favours some short-term upside as expectations that Draghi will talk down the euro are re-priced. Over the medium term we hold a bearish EURUSD view, largely as a function of relative growth prospects versus the US but believe expectations for ECB action are slightly overdone.

There are two other important events that will likely grab Draghi's attention:

LTRO impact

Another important area of focus will be Draghi’s views on the impact of the first LTRO repayment. If he suggests that large initial repayment in January is a positive sign indicating stabilization, market expectations of the amount to be paid back from LTRO2 are likely to increase, which will support the EUR. Alternatively he may caution banks about returning cash too early, since the design of the operations was to provide cheap funds in case they are needed at some point in the future and the ECB will be keen to avoid another LTRO unless absolutely necessary. A reduction in market expectations of the amount of LTRO2 borrowing to be paid back will weigh on the EUR.

Spanish auction

Another major risk event sees Spain returning to the bond market for the first time since negative headlines over Mariano Rajoy emerged last weekend. Widening periphery spreads to Germany were a driver of euro weakness on Monday and the close relationship should hold once more today. The treasury will auction €3.5-4.5bn of the SPGB Mar ’15, SPGB Jan ’18 and SPGB Jan ’29.

Via Goldman Sachs,

So how is the ECB likely to react to the recent exchange rate appreciation? Since the December ECB Governing Council meeting, the Euro has appreciated by about 3.5% on a real trade-weighted basis. Our ‘real time’ Taylor rule implies that a 3.5% appreciation would lead to a 15bp-20bp lower ECB policy rate. Combining this effect with that implied indirectly via the impact on growth and inflation, our results imply lowering policy rates by between 30bp and 50bp, depending on how much of the recent Euro appreciation reflects exogenous factors. On our current forecasts, we expect the Euro trade-weighted index to appreciate by a further 1.5% over the next quarter (with the EUR / USD cross reaching 1.40). Accounting for this further appreciation, the total downward impact on ECB rates, according to our ‘real time’ Taylor rule estimates and subject to the degree of exogenous factors driving the exchange rate appreciation, is between 45bp and 75bp.

However, we cannot hold all other determinants of the policy rate constant in this exercise. In particular, the fiscal risk premium has also moved sharply since December. And our empirical results suggest that we need to control for this effect if we are to rely on our estimated direct impact of the exchange rate on rates. Our ‘real time’ Taylor rule estimates imply that the 250bp decline in the fiscal risk premium would equate to a rise in ECB rates of around 80bp-90bp. Thus, the decline in fiscal risk would more than counter the effect of recent Euro exchange rate appreciation on ECB rates.

Hence, on our ‘real time’ Taylor rule estimates, we think the Euro exchange rate appreciation has not been sufficient to warrant a cut by the ECB, so far. Even if the Euro were to appreciate further to our forecast level of EUR / USD at 1.40, our results suggest rates would be on hold.

For all the recent talk of ‘currency wars’ and the vulnerability of the Euro area economy should the ECB ‘stand idly by’ while the other advanced economies engage in competitive devaluation, our empirical work suggests that we are still some way from an ECB policy rate cut driven by concerns about Euro appreciation.


This has the potential to be a mixed blessing:

  • On the one hand, it has been widely argued that, while competitive devaluations are self-defeating (since it is a logical impossibility for all countries to depreciate simultaneously), the implied monetary easing in each jurisdiction – and thereby in the world as a whole – is ultimately what is required to reflate the global economy. Via the pressure exerted by Euro appreciation, even a more independent and conservative central bank like the ECB will eventually be compelled to make a contribution in this direction.
  • On the other hand, by undermining international economic cooperation, competitive devaluations threaten to weaken the global economic system and institutions. Protectionist pressures may re-emerge. Capital controls and financial repression may re-segment global financial markets. Having benefited over the past two decades from the favorable supply-side effects of globalization, such setbacks would threaten global growth.

Source: Citi and Goldman Sachs

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zorba THE GREEK's picture

A lot of these Europeans are hot blooded and out-spoken.

It should be interesting to hear what they have to say when

this currency war gets into high gear.

zorba THE GREEK's picture

Mr X +1 for you.

I watched your link and plan to send it to all my friends.

It definately changes everything, including my entire

propective of the meaning of life. Thanks for the link.

Arrowflinger's picture

ECB means:





bobthehorse's picture

I've got your ECB preview.

I've got it hanging between my legs.


Sudden Debt's picture


LongSoupLine's picture

Fuck you citi and Goldman.

Nice try with the fucking charts and sound logical looking analysis on what is nothing but a fucking money printing and overleveraged derivative dick in ass show that you two fucking assholes are a part of.

Fuck off you shit for brains fucking crooks.

Orly's picture

Seriously?  You don't say.

I had no idea that Natalia Portman was a trader.


eXMachina's picture

Apparently she enjoys to get naked puts and then long calls on the beach. After dinner she likes bull spreads followed by the iron condor four-legged strategy that provides a return between the two inner legs!

Orly's picture

How long did you practice that?

falak pema's picture

thats not portman thats that girl from desp housewves.

practice makes perfect as black swan shows us.

If the soros machine is in gear we should have euro split if berlu gets elected in Italy; for sure! 

These guys would make money even on dead cadavers ripped out of mafia burials. 

Orly's picture

Thanks, again, Tyler, for a very informative piece.

You guys are the best!


chump666's picture

No, central banks are obsessed with pension funds remaining bid, there is something lurking in that - probably a last gasp. Anyways the  DAX was down over 1% neg last session, if Mario CB cartel mandate breaks.  Then the EUR will sell, PIIGS spreads will widen and stocks will sell off hard in Europe.  Can't see that happening until US markets break in 2013...middle year?

The EUR bid trade as everything to do with NY FED and ECB swaps, don't have the list, but on average it was about 500million a week?  That is a big swing to keep the EUR bid and the expense of the USD.


Orly's picture

Werd, Chump.  Did you see this from earlier, courtesy Bloomberg via where the president of Japan's pension fund said he would have to move out of JGBs if Abe gets his inflation?

"What Abenomics bulls haven’t yet explained away is what happens if Japan’s prime minister gets his way. Imagine, for a moment, that the Bank of Japan succeeds in pushing gains on consumer price to 2 percent or 3 percent. The resulting rise in 10-year bond yields would shake Japan Inc. to its core.
Just ask Takahiro Mitani, president of Japan’s public pension fund, which has $1.16 trillion in assets. On Feb. 1, he told Bloomberg News he’s considering the first changes to the fund’s asset structure in seven years as Abe’s new government pursues policies that could erode the value of $747 billion in local bonds."

Coupled with this article posted by Tyler earlier and you can see that the Japanese will have no choice but to move money from solid bonds into the "wealth-effect" equity markets.

I bet this goes over like a lead zeppelin with the Japanese people.  Seven-hundred, fifty billion dollars looking for a new home.  Think about it.

Of course, that is if you believe Abe and the BoJ have any chance of reaching that target when 30 years have failed them so far.  But with a little help from their friends (wink, wink...) and all that money on the sidelines, the chances just got a whole lot better.


chump666's picture

I didn't see that article, but yeah, it's like a forced rotation which is so dangerous.  But it's becoming addictive as a fiscal and monetary behavior.  It's frighting.  They succeed in creating a massive bid bubble on equities and bonds collapse, yields will spike higher - the funding costs will blow out more and more and more, and they print and print and print to feel the gap.  Hence the hyperinflation argument which is ringing so true.   It seems like the now CB's are turning their obsession of magic fixes to pension funds, as the 'new deal'.  It's getting more bizarre.  The ZH article revealing the possible use of pension funds as bailout accounts could be right.

Berlin, halt ein! Besinne dich. Dein Tänzer ist der Tod (Berlin, stop! Come to your senses! Your dance partner is Death.) from a poster that appeared in Berlin in the 1914 -1920 after WW1 

Berlin is us.

Orly's picture

Was that in reference to Weimar or the war?  It says it was first printed in 1919.

chump666's picture

Both, apparently the poster was a mainstay around Berlin for years, after WW1.  The country was broke, commies where fighting with the nationalists, turmoil, beginnings of inflation etc etc etc.

Hence the metaphor of death and the forever dance. 


youngman's picture

My question is who would he sell them too.....????

Also why the only option is equities....why not PM´s....

If you study Weinmar....Stocks did well....but PM´s did better

disabledvet's picture

I agree "the financial obliteration of Italy is acceptable to the Germans but not the financial obliteration of Spain." so "one and zero" that binary outcome, bitchez. there is no Continent on earth that pays more for fuel than Europe...i honestly fail to see why that is when we are literally SWIMMING in refined product here in the USA. Something tells me "using the euro as a funding mechanism to keep energy prices WAY over inflated" is the primary cause...and as such i would not be long the euro. simply put "the French batteries used to power the F-35 fighter jet should work just fine in their Nissan's too." or whatever they call their cars over there. Obviously Spain is already the "solar capital of the world" so they won't ever need to buy a car again once they go "all electric." They're off the grid already...only the crazy nations are still on it (cough, cough...Italy and France...cough, cough.) Simply put "electricity is already had for a pittance for the consumer. And soon...the means to store it as well." The biggest winner is the nation with the largest transportation grid and most voracious appetite for energy...that obviously is Germany and the USA. "nothing succeeds like excess" as they say. If that Northern German Plain is finally opened up to something other than German and Russian tank divisions the possibilities are truly amazing...not just to "the Northerners" but to all of humanity since this area can become a major food producer for all the world. The USA has already "opened up" it's Great Plains with the interstate highway system. It will be interesting to see if Wal Mart decides to "go the final mile" and offer home delivery for everything they sell. They are bigger than the Postal Service (by far now) and as such will have no problem "simply doing it" should they choose. the economic impact will be MASSIVE should the Distribution Division decide to proceed. And yes..."they'll deliver the mail for free if you want." What Wal mart wants is FOOD delivery to your home. I'll be watching with great interest what the "new private Dell computer looks like." i've been in the market for a new laptop for years now (can't everyone tell?) and i have some very simple specs: solar powered with a lithium/ion battery capable of powering the whole house i'm in "thus saving another 2000 bucks a year." in addition to powering the computer itself of course. it does not bother me if the screen size is 20 inches or the laptop needs to be 4 inches thick to do that either. and PLEEEEASE tell me "we've already built it." then i'll know "this equity market has MUCH higher to go."

jonjon831983's picture

Someone wanna spl'ain this?


"China Injects Record 860 Billion Yuan via Reverse Repos in Week"


They claim is for massive need of cash before Chinese new year.

Orly's picture

I am not sure.  Chump666 is the one for that.  I read charts.  :/

But I am wondering if it has something to do with this:

"China’s yuan dropped to the lowest level in six weeks after the central bank cut the reference rate for a second day, raising speculation it wants to slow appreciation to protect exporters amid a slide in the yen.

'China is unwilling to have a strong yuan as Japan is likely to further loosen monetary policy,” said Daniel Chan, executive vice-president at Glory Sky Global Markets Ltd. in Hong Kong. “Export growth is recovering but the momentum isn’t that strong.'

From Bloomberg via

Chump, what say you?


TruthInSunshine's picture

It's the currency wars heating up in earnest (aka "shit's getting real"):

02-06 22:10: Japanese Finance Minister Aso says monetary easing is to escape deflation; not to competitively devalue JPY

News Headline Summary Japanese Finance Minister Aso says monetary easing is to escape deflation and is not competitve JPY devaluation

- Only Germany criticizing Japan on currency.
- Crystal clear we're aiming to end JPY deflation and not weaken JPY.

Print 02:41 - Asian News - Source: Newswires


If anyone believes Aso's statement, they're an imbecile of the most spectacular order (Germany's not buying it, nor is China).

youngman's picture

Currwncy wars are starting down here in South America....Chile announced a program yesterday..and Colombia announced one two weeks ago....they both do not like their strong currencies.....Brazil too

dr.charlemagne's picture

Hey Tyler or anybody else,

Off topic, but what's up with Platinum?

Yen Cross's picture

 This shit is big time getting real. China isn't doing well, and the Europeans aren't just going to sit around an take it in the ass by Asia and the U.S.. Did you guys catch this earlier China Injects Record 860 Billion Yuan via Reverse Repos in Week - Businessweek

  China has net inflows thanks to Ben and his central banking pals, so don't be fooled that these reverse repos are for the Chinese Holiday. PBoC is pumping any way they can, short of outright printing.

   There's also French OAT(7-10-15 yr.) auction @ 10:05 gmt. With yields rising in the Piigs that should be interesting.