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22 Apr 2014
QE already prices into the Euro? - Rabobank
FXStreet (Guatemala) - Strategists at Rabobank considered Euro strength, and in turn, said it serves to bolster concern over disinflation/deflation which, as a consequence, underpins expectation the ECB will be forced to take some form of unconventional policy action (and, ultimately, QE).
Key Quotes:
“These expectations of additional ECB stimulus are helping to support positive peripheral sentiment which, in turn, sees spreads narrow but also feeds back in the form of a stronger euro as peripherals’ attractiveness to non-Eurozone investors continues to increase”.
“Clearly, then, there is a reflexive quality to this process with non-Eurozone demand for peripherals pushing up the euro which, via rising deflation concern and concomitant hopes of ECB liquidity support, further increases peripherals’ attractiveness”.
“This is a virtuous circle for peripherals (as spread narrowing creates its own momentum) but a vicious one for the ECB (speculation of QE itself increases the odds of the Bank having to engage in just such an unorthodox policy)”.
“Crucially, it seems hard to find an obvious trigger for the reversal of this self-fulfilling cycle which, in turn, points to there potentially being considerable additional momentum as regards the peripheral spread narrowing theme. Of course, this is, in part, dependent on how much ECB QE might already be in the price”.
Key Quotes:
“These expectations of additional ECB stimulus are helping to support positive peripheral sentiment which, in turn, sees spreads narrow but also feeds back in the form of a stronger euro as peripherals’ attractiveness to non-Eurozone investors continues to increase”.
“Clearly, then, there is a reflexive quality to this process with non-Eurozone demand for peripherals pushing up the euro which, via rising deflation concern and concomitant hopes of ECB liquidity support, further increases peripherals’ attractiveness”.
“This is a virtuous circle for peripherals (as spread narrowing creates its own momentum) but a vicious one for the ECB (speculation of QE itself increases the odds of the Bank having to engage in just such an unorthodox policy)”.
“Crucially, it seems hard to find an obvious trigger for the reversal of this self-fulfilling cycle which, in turn, points to there potentially being considerable additional momentum as regards the peripheral spread narrowing theme. Of course, this is, in part, dependent on how much ECB QE might already be in the price”.