Thursday, April 16, 2015

Confident Draghi endures protester | Takeaways from the ECB Q&A yesterday

The ECB monetary policy statement and press conference at the central bank’s HQ in Frankfurt yesterday was notable for two things: A serious breach of security that allowed an activist to within striking distance of Mr. Draghi at the start of his remarks, and an upbeat performance by the president that pressed all the buttons to reiterate his confidence that the Eurozone is in good shape, and will be in even better shape as time progresses.

We did not record the statement or press conference, which was broadcast live by the ECB, but the picture below, taken from the USA Today website, gives an idea of how dramatic the protest was.

After taking a break for a brief period after the protest, Mr. Draghi resumed his statement and then gave a bravura performance on the efficacy of the measures that have been put in place to stimulate the Eurozone economy. As expected, interest rates remained unchanged and it was made very clear that Quantitative Easing will run its course.

Takeaways from the ECB Q&A yesterday

In answer to questions about QE and the fear expressed by some commentators that there will not be enough sovereign bonds to sustain it, Mr. Draghi said that he could not understand how that could be the case. Banks do not need to hold sovereign bonds in order to comply with liquidity requirements – the cash they will receive from the ECB in return for those bonds will satisfy liquidity requirements just as well.

Other comments reiterated that the value of the Single Currency was not in the mandate of the ECB. Its only concern is with inflation, or the lack of it. It is a rule-bound organisation, and the rules state that Greek banks do not fulfil the criteria for a waiver of the non-acceptance of their corporate bonds for regular lending facilities. Therefore they must rely on the Emergency Liquidity Assistance (ELA), which is administered through the Greek central bank.

He had word or two about austerity, although he did not call it that. In ECB-speak it is “fiscal policy consolidation” and, according to the president, there will be “lower headwinds” from this in the future, “mainly due to the work that has already been done up to now by member state governments”.

The whole performance was so positive that, for a while, the EURUSD pair looked like it might resume the upward trajectory that it had embarked on the day before, after poor enough retail sales in the US. That lasted just as long as it took the market to realise that bond traders were reducing the yields on all Eurozone member state fixed-income instruments to ridiculously low levels (with the exception of those issued by Greece). This was a reminder to the Forex market that the Euro is heading south on the back of a solid commitment to QE by the ECB, and all that that entails.

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