07 května 2009

7/5 ECB comments

The ECB reduced rates 25 bps as widely expected to bring the rate to 1.00%. Mr. Trichet planned remarks outlined an extension of the term of its refinancing operations to 12 months and will extend the liberal collateral rules until the end of 2010.
Critically, Mr. Trichet also indicated that the ECB would buy covered bonds, and said during the Q&A portion of the press conference that the technicalities of the bond buying would be outlined at the next meeting and that the amount of the purchases would be approximately EUR 60 billion.
When asked whether 1.00% would be the low point for rates, Mr. Trichet said it is not necessarily the lowest point, because it cannot control the trajectory of future conditions, but that it is the appropriate rate for now. So how does this performance from the ECB measure up to expectations in the market.
Considering the background of risk willingness in recent weeks, this was a relatively dovish performance from the bank. But considering the expectations originating from the previous meeting, the ECB announcements were relatively inline.
Most importantly, EUR has been a terrible laggard for a couple of weeks or more now and the reaction seems to be more about sell the rumor, buy the fact on QE than anything else. Look at EURAUD for an example of this. Longer term, the driver for EUR will continue to be risk appetite and relative economic performance. The latter and fears of the QE reality have seen the EUR weaker in some of the crosses and on a broader basis until today, and the former will be what puts a halt to the EURUSD and EURJPY rallies.

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