After a kneejerk move lower in the Euro, tumbling briefly as low as 1.1930 when Mario Draghi made an explicit reference to the strength of the Euro in his prepared remarks, stating that "the recent volatility in the exchange rate represents a source of uncertainty which requires monitoring with regard to its possible implications for the medium-term outlook for price stability", the EURUSD has since surged more than 100 pips, and was up to 1.2050, nearing the 2017 high of 1.2070 during the Q&A part of today's press conference which has been dubbed "pretty agreeable" by several sellside desks, even as the yield on the 10Y Bund has tumbled with Draghi suggesting that no discussing of tapering has taken place yet, indicating QE will likely remain unchanged for longer than even the skeptics imagined.
Ironically, in a comment by Danske Bank analyst Jens Peter Sorensen released shortly after the ECB announcement, the strategist said that “If [the ECB] had removed the part of scaling up, then the euro would have become stronger, and he is trying to avoid that,” Sorensen says adding that "the ECB is trying to kill volatility in the markets." So far the ECB has failed to do that.
Commenting on Draghi's remarks, ABN Amro's Nick Kounis summarizes the speech (in short) as follows: 1, More concern about euro strength 2. QE re-calibration in the fall (Oct) 3. 2019 inflation a little lower
#ECB in short (so far): 1, More concern about euro strength 2. QE re-calibration in the fall (Oct) 3. 2019 inflation a little lower— Nick Kounis (@nickkounis) September 7, 2017
Elsewhere, in Draghi's speech there have been no explicit mentions of links between the currency and QE decision, with Draghi taking a patient approach on inflation, saying it will eventually converge, both EUR positive.
Among the other soundbites, Draghi briefly touched on the future of QE and tapering, saying that "ECB discussion on QE was very preliminary. Various scenarios were discussed as well as various pros and cons. The ECB discussed the QE covered length, size of plan." When asked to comment on financial conditions, Draghi merely said that they are still broadly supportive, and that Euro gains mean that financial conditions have tightened.
Draghi also answered a question on recent deviations from the capital key, which he said "don't indicate anything." Draghi also said that the ECB didn't discuss widening asset classes in QE, although that is certainly hard to believe with the central bank almost running out of Bunds to purchase.
So even as the EUR has interpreted Draghi's speech as hawkish, while the bond market and Stoxx 600 see it as delightfully dovish, FX strategists note that Draghi will have to make express hawkish signals, i.e., a mention of the taper, for the currency to move above 1.21.
And like that, Draghi has kicked the can one more month, confirming that the bulk of QE decisions will be taken in October.
Commenting on the latest Draghi mishmash, Bloomberg writes that the market will be quite jumpy before the October ECB meeting, adding that "Draghi does not like the characterization of the euro zone being in a state of "high uncertainty" as we await the new plan, and he certainly isn’t going to fall into the trap of discussing what euro levels he’d be worried about. Even so, markets are going to be jumpy before the October meeting presumably, and if he attends the World Bank and IMF meetings in Washington, any comments there will be scrutinized."
And now that the market is supremely confused, we expect the ECB to lob the next Reuters trial balloon any moment to punish all those who keep buying the EUR. Here is a start: a rehash of "Whatever It Takes":
- DRAGHI SAYS NOTHING WILL DERAIL ECB'S WILL TO DELIVER INFLATION
Which, incidentally, is euro negative...