ECB Press Conference Helps To Boost The Euro

ECB Press Conference on March 7 started off with a reiteration of recent comments but Draghi’s tone soon turned upbeat as soft data indicated improvements in the overall Euro area; although the Staff Projections downgraded growth and inflation for both 2013 and 2014, there were was mainly due to the “carryover” declines from the fourth quarter of 2012, as Draghi called it.  Overall the ECB Press Conference was rather positive, as reflected in the price action of the EURUSD, which moved from the 1.3000 to the 1.3100 during and immediately after the ECB Press Conference.

Here are some highlights to the ECB Press Conference:

ECB Press Conference – Prepared Speech

1. Inflation has declined further, as anticipated; underlying pace of inflation expectations remains subdued; monetary policy stance remains accommodative
2. Economic weakness has extended into 2013, allowing policy stance to remain accommodative.
3. Balance sheet adjustments continues to dampen economic activity, which should gradually improve later in 2013.
4. Governments must continue economic reforms to sustain confidence
5. Around $200B in LTRO funds have been repaid by banks, reflecting improved market confidence.
6. ECB to continue money market conditions closely.
7. Data suggest economy should stabilize in the first half of 2013, export growth and improving domestic demand will help with stabilization.
8. Growth risks remain to the downside, including weaker consumption, lower exports and slow reforms.
9. Inflation figures may be somewhat volatile but underlying price pressures should remain contained, inflation expectations are well anchored
10. Price outlook is broadly balanced: upside inflation risks are from taxes and oil pressures, downside inflation risks are from weaker economic activity.
11. Essential to strengthen the resilience of banks, crucial to reintegrate the banking system and reduce the fragmentation of credit markets.
12. SSM mechanism is crutial to reintegrating the European banking system.
13. Progress is being made in fiscal consolidation in the eurozone, further consolidation must be part of comprehensive structural reform.

ECB Press Conference – Q&A

1. We did discuss the possibility of a rate cut, consensus was to leave rates unchanged; reiterates that ECB does not precommit
2. ECB is observing a dichotomy between negative hard data reports and positive sentiment from broad soft economic indicators.
3. Target 2 imbalances have improved, sovereign funding has improved versus last year, LTRO is nearly 40% repaid, seeing strengthening deposits even in stressed member states.
4. One negative sign is that SMEs are still having funding problems, although large companies are not having trouble finding funding.
5. Policy stance to remain accommodative as long as needed.
6. Countries that have frontloaded fiscal reduction will gradually see a reduction in the contractionary effect of fiscal reduction.
7. Rumors that the ECB is leaving the troika are the “angst of the week,” ECB’s policy responsibilities demand that it remain part of the troika [note: On March 4th there were rumors, later refuted, that the ECB was leaving the troika]
8. There are no signs of deflation in the eurozone, differing prices inside the eurozone are a good sign, part of rebalancing.
9. Question of whether ECB is fueling asset bubbles is “too difficult to be answered in a clear, unambiguous way”
10. Fiscal fragmentation is receding not worsening.
11. People underestimate amount of political capital invested in the euro.
12. OMT cannot be used to enhance a return to public financing markets, Ireland has made progress but now is no time to stop with reforms.
13. Good progress is being made in Cyprus, there may be a program by the second half of March. Systemic risks from Cyprus may not be small, judge it to be very important.
14. ECB is still working to construct the legal documentation for the specific rules for the OMT. Nations need to be “on the market by themselves” to be able to access OMT, be able to issue certain quantities of bonds to a broad spectrum of customers
15. Reiterates G20 statement on currencies; says exchange rate not a policy target for ECB; Euro near long-term averages
16. Exchange rate is important for both growth and price stability; will continue to watch FX
17. Sustained appreciation of EUR exchange rates has potential to alter risk assessment on inflation.
18. Reiterates ECB has considered the concept of negative deposit rates; notes negative deposit rates are uncharted waters and they could have serious unintended consequences.

How to interpret ECB Press Conference?

Regardless of what was actually said during the Press Conference, Draghi’s tone today was particularly upbeat to say the least.  For instance, when Draghi was asked about the downgrade of Staff Projections and the market volatility following the Italian election, Draghi basically downplayed the former and outright dismissed the latter, which in my opinion says a lot about ECB’s position, at least for this month… And I don’t know if it is just a coincidence, but I did mention this in my traderoom yesterday that Draghi will probably be upbeat tomorrow, and it seems that I am right on the money, that Draghi is playing yo-yo with the market, with one month positive, one month negative, and again positive for this month…

Because of this “revelation”, I believe EURUSD will probably find strong support in the recent ranges, (ECB Press Conference usually sets the tone for the Euro for the rest of the month) and could even make another attempt to retest the 1.33 ~ 1.35 level, if we don’t get any negative surprises.  Of course, my view now has changed (temporarily) to BUY on dips, as close to the 1.3000 as possible, because it is not only a psychological level, but also technical backed by fundamental.

Thanks,

FUNDAMENTALS

Nonfarm Payroll And Future Direction Of Euro…

Cyprus Crisis To Cloud EU Outlook…

ECB Press Conference Helps To Boost The Euro

G7 Statement Gives Japan A Free Hall Pass?

Japanese Yen Strength May Be A Blessing In Disguise?