Market Drivers January 22, 2015

Muted Asian trade as markets await Draghi presser
UK Public Sector Net borrowing rises on payment to EU
Nikkei 0.28% Europe 0.19%
Oil $47/bbl
Gold $1289/oz.

Europe and Asia:
GBP PSNB 12.5 vs. 9.2B

North America:
EUR ECB Presser 8:30
USD weekly jobless 08:30

Markets were generally quiet ahead of the key ECB meeting later today with EURUSD mildly bid throughout the early European session as the pair climbed above the 1.1600 figure. Yesterday a series of leaks suggested that ECB would commence a bond buying program at a pace of about 50 Billion euros per month – which if true would be at the low end of market estimates.

As our colleague Kathy Lien noted yesterday, “It is no secret that central banks hate volatility. Whenever possible, they will go out their way to minimize the market’s reaction to big changes in monetary policy. The European Central Bank is known for preparing the market for these changes by sending a consistent message to investors through speeches from policymakers. We know that most ECB officials believe that it is time to send a strong signal to the market through large-scale asset purchases and today’s leaked proposal will most likely turn out to be an attempt to prepare investors for the historic announcement by controlling their reaction.”

The key aspect of the program will be the actual mechanics of the deal. Will ECB be the primary buyer, or will it delegate the responsibility to each member’s central banks? How will the interest payments be divided given the difference in yield between the various sovereign debts as well as the difference in equity ownership of the ECB? Most importantly how will the transmission mechanism work?

The function of QE is to spur lending, but in deflationary environment borrowing slows to a halt as funds borrowed today become vastly more expensive to service tomorrow. That’s why Mr. Draghi is also likely to focus on the ABS market as well as perhaps offer some stimulus to the SME sector – all in order to stimulate growth.

It will be interesting to see how the market reacts given the fact that many of the details have already been leaked. Ironically enough if traders view Mr. Draghi proposals as serious policy shifts that have a chance of reviving the moribund EZ economy, then the EUR/USD could actually rally taking out the 1.1700 figure as the day proceeds.

Today’s policy speech could also have a big impact on EURCHF. If Mr. Draghi imbues the market with a dose of confidence the pair is likely to rise above parity once again as risk aversion fears begin to ease.

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