Global daily insight 22 july 2016

Daily Insight

Group Economics Macro & Financial Markets Research

21 July 2016

ECB to ease in September Central banks: ECB waiting for more information - The ECB kept its policy rates and Macro & Financial Markets Research Team

target for asset purchases on hold as expected. In the press conference following the

Nick.kounis@nl.abnamro.com

decision, ECB President Mario Draghi stressed that there was a lot of uncertainty about the

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outlook, but that the central bank was ready to act if needed once a clearer picture emerged.

nick.kounis@nl.abnamro.com

This would possibly be in September in the light of the central bank’s new forecasts. The ECB’s base case continues to be for ‘an ongoing economic recovery and an increase in inflation rates’ given that following the UK’s vote to leave markets had been encouragingly ‘resilient’. On the other hand, given the ‘uncertainties’, the ECB would monitor the situation ‘very closely’. In addition, the ECB statement signalled that ‘when we have more information, including new staff projections, we will be in a better position to reassess the underlying macroeconomic conditions’ and ‘If warranted to achieve its objective, the Governing Council will act by using all the instruments available within its mandate’. Indeed, during the Q&A Mr Draghi went out of his way to stress the ECB’s ‘readiness, willingness and ability to act’. However, there was no further information provided on the types of measures it would take or of any actions to increase the eligible universe of bonds for the QE programme, which were not discussed according the ECB President. Finally, in terms of Italy’s banking problems, Mr Draghi seemed to put himself more on the side of the Italian government, which wants a public sector bail-out, than the European Commission and German government, that are insisting on a bail-in of the private sector. (Nick Kounis) Central banks II: ECB expected to ease in September - We expect the ECB to step up its QE programme in September (with monthly asset purchases rising to EUR 100bn from EUR 80bn). In addition, it is likely to extend the programme to the end of next year, compared to the soft deadline of March 2017 currently. The ECB will need to also announce measures to expand the eligible universe of public sector bonds in order to meet these targets, in fact it needs to do that even to meet its existing targets. This reflects that the fall in bond yields has meant more and more government bonds have yields below the deposit rate (of -0.4%) making them ineligible. There are three major options to change the programme. First, dropping the deposit rate floor for purchases. Second, increasing the issuer or issue limit.

Third, dropping the capital key weights for purchases and moving to a debt weighted-key.

We think options 1 or 2 will be deployed (or some combination) rather that option 3, which would be politically more difficult. A debt key would mean that the ECB would buy more Italian and Belgian bonds, while options 1 and 2 would keep the relative amounts of bonds of different countries bought unchanged compared to the current system. (Nick Kounis)

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Daily Insig ght - ECB to ease in Septtember - 21 J July 2016

Global FX: F Focus on chances of po olicy easing - Since the UK'ss vote to leave the EU, the currency y markets have e been focused d on the likeliho ood and timing of BoJ, BoE and ECB monetarry policy easing g. Today, the ECB E left moneta ary policy unchhanged as expected, but Draghi le eft the door wid de open to take e further measu ures, most likeely in Septembe er. The euro was rath her volatile duriing the press conference, c with h some initial ddisappointmentt that Mr Draghi was w not more d dovish leading to t euro strength, but afterwarrds EUR/USD more m than reversed d its gains. Goi ng forward, we e expect the eu uro to be rangee-bound versus s the US dollar at around 1.10. L Last week, the BoE refrained from easing m monetary policy y, which came as s a complete su urprise to finan ncial markets, but b it strongly ssignalled that itt would ease policy att the August me eeting. This we eek two BoE offficials hinted thhat monetary policy p easing at the Au ugust meeting is not a done deal. d This and resilient UK ecconomic data have supporte ed sterling. We e think that sterrling will weaken going forwarrd as we expec ct UK data to start to weaken w marked dly and negotia ations between n the UK and thhe EU to prove e to be tough.

Over the e recent weekss, expectations about moneta ary and fiscal sstimulus in Japa an, in a construc ctive investor cllimate, have weighed w on the yen. There havve even been some s expectattions about hellicopter money y arriving in Jap pan. We think itt will be difficult for the BoJ to meet these t high exp pectations on 29 2 July. Therefo ore, we expectt the yen to stre engthen going forward. (George ette Boele)

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