In addition to an ‘interest rates corridor cut’ (refi rate down to 5bps, deposit rate to -0.20% and marginal lending rate to 0.30%), the ECB surprised the market today after Draghi announced that the central bank will start buying securitised loans (portfolios of transparent ABS which will include loans to the real economy and real estate assets) and euro-denominated covered bonds in order to boost lending to small and mid-size companies (further details next meeting on Oct. 2nd).
It was clear that ECB aims to get the total assets of its balance sheet back to the levels seen in 2012, which is to say a 1 trillion-Euro expansion. The ECB balance sheet (total assets) is now standing at 2.038tr Euros according to the EBBSTOTA index from Bloomberg, 34% lower than June 2012 high of 3.1tr Euros. This would bring back the Fed-to-ECB balance sheet ratio (one of the pair’s strong drivers) to 1.22 within the next few years, down from 1.67 where it stands at the moment, therefore adding pressure to the single currency.
EURUSD started the day quite flat, trading at around 1.3150, before it was sent to 1.3000 at first during Draghi’s conference and even lower below 1.2940 as core European bonds yields turned negative to 2Y as you can see it below. French 2-year yield is now trading at -2.8bps, Austrian 2-year yield at -0.6%. German yields are now negative up to 4 years.
In addition, the Governing Council reduced its growth and annual inflation to 0.9% and 0.6% for 2014, down from 1% and 0.7% respectively.
If you have a look at the picture chart below, which represents the full ‘ECB bailout scheme’ in order to sustain the European economy, you just start to think ‘what else could they do more?’
MRO, LTRO, ZIRP, SMP, OMT… and now T-LTROs, ABS and covered bonds. There are talks that Europe is heading towards a long period of stagnation / deflation period, where QE will be the only [pretended] option to get out of the negative spiral (have a look at Japan since Abe took office in December 2012 and see if QE is the solution).
If we have a look at EUR/CHF, it ‘only’ went down 20 pips (bottomed at 1.2044) after the ECB’s action; therefore we think that the SNB has already started buying some Euros in order to protect its floor at 1.2000.
USDCHF broke through the 0.9300 level to trade at 0.9330 earlier this afternoon, slightly below its 50-percent Fibo retracement of 0.8700 – 0.9980. The next resistance on the topside stands at 0.9450, followed by the psychological 0.9500.