The possibility of an ECB taper is going to be the hot topic at the meeting today
Anyone who was knocking around in 2013 will remember the market "taper tantrum" when the Fed hinted that they would start turning off the QE taps. As usual the market got itself in a bit of a tizzy several times trying to guess when and by how much the Fed would start winding down QE. Stocks threw a strop, EM & developed FX went potty and bond sellers went short and got their arses handed to them once again.
Now it's the ECB's turn following the erroneous Bloomberg headline at the beginning of Oct, that the ECB will taper. At the moment the market really isn't buying into the story that the ECB would start tapering anytime soon, otherwise we'd probably be trading at 1.19 not 1.09 but the seed has been sown and you can bet your last euro that that will be the main line of questioning at today's presser.
So is the taper story such a crazy one? Not at all but it has to be put into context.
1. Will the ECB eventually taper?
Going at the rate they are, of course it's likely, near whatever end date they set.
2. Will they taper or talk about tapering before March 2017?
Not while inflation is running at 0.4% and core at 0.8% y/y. Not while the economy is still pretty weak, there's high employment and so much tilt to the downside. There's no way Draghi is going to give any indication that they are looking to reduce QE as that will send the euro into orbit, and he doesn't want that.
3. What could Draghi say about tapering?
Here's the crux of it.
The ECB are heading towards their initial end date next March so they will need to address that
They've made it clear they are still piling ahead with their €80bn per month QE
There's constant worries that more and more assets are falling out of their shopping basket
The intended results from QE aren't happening quickly
They've constantly beaten the stick that they are prepared to do more, do it longer, and do it differently.
So, if we get anything new from Draghi, it's going to be along those lines.
What might be possible is that we get a taper that's not really a taper. The ECB might be worried about extending QE at it's current rate so what they might do is prime the market for an extension of QE but at a reduced rate. At the start QE was given 18 months and here we are with 5 left. Considering they've not been able to get inflation above 0.4% for over 2 years, they're hardly going to cut QE because they now think they'll meet their target in 5 months* (*the only thing that might get CPI up quicker is the price of oil rising). Lowering the amount of purchases but pushing the next deadline out for something like 2 years or more sends the message that they are going to stay at it until the job is done. After all, they can still stop it anytime if they hit their goals. That message keeps the euro in check and the easy money rolling, while buying them the time they need. It also gives them some breathing room on possible asset shortages as the demand pressure eases and stops prices rising/yields falling as much.
Announcing something shorter like a 6 month extension is unlikely to appease the market and stop the euro from taking off, as we'll be right in the same taper situation that we were in back in 2013.
For today, whether Draghi chooses to address the QE situation now of whether he passes over it until Dec is unknown but the press will badger him about it today.
I guess that whatever your view or opinion on the matter is, the one question we have to ask is, do you bet against Draghi staying dovish and not saying anything that will send the euro massively higher?
Is it sink or swim time for the euro and Mario Draghi.
